Gaps in Biden's Plan, Part 1

The American Jobs Plan is historic in it's scale, but we can't pat ourselves on the back yet.

While we don’t yet know what the final bill will look like for Biden’s American Jobs Plan, the White House has made many details available over the last few weeks—and the details are historic. The bill includes the largest expenditure on American infrastructure in decades with a lot of money going towards tackling climate change and improving our care economy. Unfortunately, even before Biden begins compromising on the plan, it won’t be enough. As my colleague Zack Exley points out in this post, there is a big hole in how the plan tackles investing in the industries needed to jumpstart production in America. I really recommend you read Zack’s post to learn more about that, because it’s by far the biggest gap (and is the real Part 1 of this series).

But even if we ignore the failure to properly invest in American industry, I fear Biden will fail to accomplish even the more limited goals currently set out in the plan because of some key gaps. Today’s post focuses on one of those gaps:

Clean Isn’t the Obvious Choice for Consumers

We spend a lot of time at New Consensus focusing on how to upgrade and build new industries in America. But alongside investment in these industries, we have to figure out how to get millions of people in America to upgrade their homes, cars, and other goods to clean energy alternatives as fast as possible. We believe in freedom in America, so we can’t just force everyone to do it. Of course, one big advantage we have here is that clean energy alternatives to goods are often better and, in the long run, cheaper. But unfortunately right now, they are often more expensive. Government investment in these industries will help drive down costs, but that will take time. So we need a plan for consumers to adopt these new products en masse at the same time that the government is investing in these industries—and the new skyrocketing consumer demand will, in turn, get companies to build out clean energy industries further. It’s a virtuous cycle.

Biden’s American Jobs Plan acknowledges this and has some provisions for tax incentives and grants to get consumers to buy clean goods. But unfortunately, it simply doesn’t go far enough, tax incentives are backwards, and a system of rebates and grants is too complicated. Given the urgency of converting our economy over to clean energy, we need to make the decision to buy clean the obvious choice for consumers. For example, if we gave consumers enough money to buy electric cars to the point that a Tesla Model 3 would cost half as much as any gas powered vehicle, people would obviously buy Tesla Model 3s for new cars. But even this would not be enough to get people with gas-powered vehicles that work perfectly fine to spend new money to switch over. We’d likely need to do something like what France is doing to get people to buy electric bicycles (except we’d do it with cars). We should make the the decision of buying a gas-powered vehicle seem as dumb as buying a whale oil powered vehicle—and the Federal Government has the power to do that.

When consumer incentives don’t go far enough or are poorly designed, people don’t use them. This then leads our policymakers to wrongly conclude that trying the incentive out at all was a bad idea since, clearly (to them), people simply do not want the thing we are incentivizing them to buy!

As an example, let’s take a look at electric heat pumps. I’m trying to upgrade my own house to an electric heat pump right now, so I’ve got heat pumps on my mind. Electric heat pumps don’t get as much attention as electric cars, but they are one of the key technologies to removing emissions from buildings and houses. They replace gas-powered furnaces and water heaters with electricity, and electrifying everything is key to reducing emissions. They tend to produce better air quality and include air conditioning for free. We don’t even need to invent anything new to use them—heat pumps have been around since the 1800s. All we have to do is build enough electric heat pumps to replace every gas-powered furnace in houses and buildings across the country, and then do the work of installing them everywhere. In more extreme climates in America, we’ll probably have to improve the insulation of the buildings we install them in, but that’s about it. This should be a no-brainer. You can read more about electric heat pumps here, here, and here see how they fit in with an overall plan to electrify homes here.

Biden’s plan talks about using federal procurement and some direct investment to jumpstart modernizing buildings and reducing their emissions. Here’s the relevant paragraph:

This is a good start, though it likely won’t be even close to enough (remember, these amounts are over 10 years). Currently, a new heat pump costs about $7,000 on average. So even if all we try to do is modernize 2 million buildings (Biden’s goal over 10 years in the American Jobs Plan), just the cost of buying these heat pumps will be $14 billion, or 30% of all the money allocated in this paragraph. Now put that in the context of how many buildings there are total in the US (6 million commercial buildings, 140 million housing units) and you see just how little of a dent this will make to total building emissions. This is, of course, extremely rough back-of-the-envelope math, but we’re not even within an order of magnitude of what’s needed to replace the heating/cooling systems of every building, much less fully modernize them!

Biden’s plan doesn’t mention anything in particular about consumer incentives to buy electric heat pumps, but it has this:

So Biden will use a combination of expanding existing tax credits, block grants, and the Weatherization Assistance program to get people to replace their gas furnaces and air conditioners with electric heat pumps. This is good, but it won’t be enough to get a mass-scale conversion to heat pumps.

To explain why, let’s look at just the finances of this from a household’s perspective. These days, it’s already about as expensive to install an electric heat pump as it is a gas furnace, and it’s usually cheaper to operate an electric heat pump than a gas furnace. According to the DOE, “Today's heat pump can reduce your electricity use for heating by approximately 50% compared to electric resistance heating such as furnaces and baseboard heaters.” And yet, despite this, only about 1% of homes used them as of 2018.

Part of this is because there is always inertia in decision-making—if gas furnaces have been working for you, and electric heat pumps cost about the same, why switch to something new that may or may not work as well? There are all kinds of cases where a heat pump ends up being more expensive than a gas furnace to install to where it is definitely not the obvious choice to switch when you are looking to replace your furnace. To make heat pumps the obvious choice every time, the cost of electric heat pumps for consumers has to go down dramatically—at least to less than half of a gas furnace. The promise of future energy savings don’t do that—the savings are not enough and future money is never a sure thing. The federal tax credits right now are tiny relative to the cost of a heat pump (and as far as I can tell have expired)—capping out at $300. And since they are tax credits, it’s not as good as an up front rebate—again, people want money now, not in the future. The Weatherization Assistance Program only applies to low income households and requires an application which can then take weeks or months to get approved for. Some states and cities have their own clean energy rebates, but all of them have separate application processes. The result is that consumers are faced with a huge amount of paper work and red tape in order to access nominal savings. Who’s going to go through the trouble?

But of course, the bigger reason no one is rushing to switch to electric heat pumps is that existing furnaces last a long time—up to 30 years. So really, the Biden administration should be thinking about how to make the obvious choice be to replace your currently perfectly functional gas furnace with a new electric heat pump. Biden’s plans will barely affect consumer decision making when they are already thinking of getting a new heat pump, and will do absolutely nothing to get existing owners of functional gas furnaces to change.

So what could Biden do instead?

Well, we know that electric heat pumps reduce energy costs by 50%—and that as the price of electricity keeps dropping, the cost of energy from an electric heat pump will keep going down compared to gas furnaces. However, this is money that will be made in the long term, and most people don’t have the capital or time to wait for long-term, not exactly stable savings like that. But the government does.

So here’s a rough idea for the kind of plan Biden could do: offer every American homeowner $10,000 up front as long as they use part of it to buy and install an electric heat pump. In exchange, each homeowner would agree to split half their energy savings each year with the government until the government makes back its $10,000. If energy prices go up one year, you won’t owe the government anything.

This gives Americans an obvious choice to pick the clean option—who’s going to turn down 10k in cash with only one string attached? And the government makes its money back in the long run, so even budget hawks in Congress should be happy. If Biden does a good job of promoting it, doing a national media tour, running ads, and making it as well known nationally as the stimmies, it could get the kind of mass adoption we need to create a real dent in building emissions.

Of course this is a very rough plan (let us know what you think of it in the comments!), and we would need to work out the exact details of how much money the government should give, how to determine what the ‘energy savings’ are, etc. But the principle is this: we should make the decision for people to switch to clean energy alternatives so obvious, that not doing so leaves thousands of dollars on the table. And we should make the government, not the consumer, frontload the cost because Uncle Sam can.