With Clean-Energy Default Rules, It's Easy Being Green
Last month, President Obama proposed a federal investment of $2 billion during the next decade for research on alternative sources of fuel for cars, trucks, and buses. The move is laudable, but the administration is undoubtedly aware that a commitment of this kind won’t do what needs to be done to combat serious environmental problems, including climate change. Significant progress in reducing greenhouse gases will remain difficult to achieve as long as clean sources of energy are more expensive than the dirty kind.
In the last five years, energy consumption in the U.S. has fallen significantly and carbon emissions have dropped by more than 10 percent. These developments have been driven by a number of factors, including an unanticipated boom in natural gas production, a sluggish economy, and tougher fuel-efficiency standards for vehicles. But the U.S., the world’s largest economy and second-biggest source of carbon emissions (after China), can do more. Some of the most widely discussed proposals for increasing clean energy use, such as a carbon tax, face resistance in Congress, not least because the economy continues to struggle and costly regulatory requirements are rightly subject to careful legislative scrutiny.
While the debate simmers, both the private and public sectors can promote environmental protection now—without mandates, bans, or expensive new regulations. The simplest approach involves the use of default rules, which specify what happens when people do nothing at all.
Here’s a small example. Human beings use a lot of paper, and paper requires the destruction of a lot of trees. Suppose a private or public institution wants to save money and protect the environment by reducing its use of paper. The institution might make a little intervention: alter its default printer setting from “print on a single page” to “print on front and back.” Not long ago, Rutgers University adopted a double-sided printing default. After four years, the university had reduced paper consumption by more than 55 million sheets, the equivalent of 4,650 trees. Countless people use far more paper than they need only because of that “single page” default; a change would produce significant savings.
Most people in the U.S. don’t use clean energy in their homes and offices, in part because it’s difficult and time-consuming to find out how to do so. Environmentally friendly default rules could change that. In Germany, two communities, Schönau and Wüstenhagen, show strikingly high levels of clean energy use—more than 90 percent. This is a dramatic contrast to the relatively low level of participation in clean energy programs in other German cities and towns. The reason for the difference? In the two towns people are automatically enrolled in clean energy programs (but can opt out).
Compared with mandates, green default rules have the important advantage of maintaining freedom of choice, and they have the potential to protect the environment, save money, increase energy independence, and reduce waste.
Clean energy is sometimes expensive, and no one should impose excessively costly default rules on users. In deciding which default rule is best, public and private institutions might have to make some hard choices about how to balance economic and environmental values. But there’s no question that we can make progress through sensible default rules that preserve freedom of choice and help to avoid the rigidity, cost, and unintended bad consequences of mandates and bans.
Default rules have an established track record, and they’re being used by smart businesses and governments in many areas. They count as one of the most promising and innovative, yet sometimes overlooked, tools for achieving social goals.
In the U.S., employers have long asked workers whether they want to enroll in 401(k) plans. Under the standard approach, the default rule is nonenrollment. Even when enrollment is easy, the number of employees who enroll, or opt in, is relatively low, particularly in the initial years of eligibility. As a result, a lot of workers end up with insufficient savings for retirement.
Many large companies, including Boeing and AT&T, have changed the default to automatic enrollment. Employees save more and save earlier—even when opting out is easy—and are able to retire with far more money. (The most successful plans combine automatic enrollment with Save More Tomorrow, a private sector initiative that allows employees to commit to increase their contributions as their salaries rise.) Automatic enrollment benefits all groups, with increased savings for Hispanics, blacks, and women in particular. In part because of its success, automatic enrollment in savings plans has risen sharply: Fifty-six percent of U.S. employers now use such plans, up from 14 percent in 2003. They’ve been found to have a bigger effect on encouraging savings than significant economic incentives such as tax breaks for savers.
Countries have seen similarly large results when using default rules to promote organ donations. In Austria, for example, the organ donation consent rate is more than 99 percent, while in neighboring Germany the rate is just 12 percent. Austria, unlike Germany, “presumes consent,” which requires people to opt out of a presumption that they’re willing to donate their organs after death. Nations that presume consent end up with far higher donation rates than those that ask people to opt in.
Notwithstanding their lifesaving potential, presumed-consent policies run into some serious objections involving personal privacy. Even so, the default rule unquestionably makes a significant difference in increasing donation rates.
Why do default rules have such a big effect? There appear to be three contributing factors. The first involves inertia. To change the default, people have to make an active choice to reject it. In light of the power of inertia and the all-too-human tendency to procrastinate, many people simply continue with the status quo.
The second factor involves what people might see as an implicit endorsement of the default rule. If, for instance, your state presumes you want clean energy, you might well be more inclined to conclude that most people, or most informed people, believe this is the right course of action. You might trust them enough to follow their lead. Many people (of course not all) think the default was chosen by someone sensible for a good reason.
Third, and most interestingly, the default rule sticks because of a phenomenon that behavioral economists call loss aversion. Suppose you are not getting clean energy and are asked whether you want to switch to it, even though it costs a bit more. You might think you don’t want to lose the money. But if you already have clean energy and are asked whether you want to save a little by opting out, you might not really care. Where you start off sets your reference point.
We’re in the early stages of thinking about the best default rules for environmental protection, although there’s no question that such rules could potentially have a large impact on consumer behavior. How might this work?
In the easy cases, businesses and governments would choose a default rule that saves consumers money while also reducing pollution. But suppose the selection of the default rule requires a choice between cost and environmental values—as is the case with at least one of the two communities in Germany, which opts for a green default even though consumers must pay a bit more. To make that choice, policymakers should try to get a clear sense of the magnitude of the economic and environmental effects. If the green option costs a lot and the environmental benefits are modest, it doesn’t make a lot of sense to adopt it as the default. If it costs only a little more and it’s a lot better on environmental grounds, it starts to look like the smart choice.
In circumstances where we don’t know which default rule is best, we might adopt a system of “active choosing,” in which people are simply asked to say what they prefer. Too often, people are defaulted into an outcome they might not select if presented with a choice. Why not ask them to say what they want?
Defaults are a pervasive part of human life. If we don’t notice them, it’s only because they tend to be an invisible part of the social background. Because they maintain freedom of choice, they have big advantages over mandates and bans. If private and public institutions choose smart defaults to promote clean energy, they’ll sometimes be able to win the trifecta: saving money, increasing energy security, and protecting the environment all at the same time.