October 19, 2011
There is a well-worn joke in the economics profession that involves two economists – one young and one old – walking down the street together:
The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”
Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would havealready picked it up by now.”
The conclusion, of course, is that markets are efficient and if there were large opportunities to profit, someone would have taken them already. Many have used this logic to argue against the notion that energy efficiency is a productive use of capital, while many others have noted that this viewpoint makes no sense at all.
It should be fairly obvious to readers that we here at Financing Efficiency see $20 bills on the ground all the time. Building energy efficiency has vast potential for saving money and the business of saving energy hasn’t even begun to scale yet. But that is neither here nor there. The point of today’s post is to use the $20 bill story as a window into analyzing the barriers to scaling the energy efficiency market.
So let’s take another look at that metaphorical $20 bill lying on the sidewalk. Imagine a building owner walks down the street and walks right by without picking up the bill. Why would that be the case?
- Maybe the building owner sees the $20 bill, but is too busy to bend down to pick it up. Or maybe the building owner sees the $20 bill, but doesnt exactly know how to pick it up, and would have to hire a mechanical engineer to do it for him and it doesnt seem worth all the time and effort. Or maybe the building owner doesn’t even see the $20 bill, because it is hidden in the leaky ducts of his ventilation system and just blowing out the window. Broadly, this category of barriers can be summed up as “complexity”. If efficiency is perceived to take too much time, too much effort, or too much uncertainty, owners are much less likely to move forward.
- Maybe instead of seeing a $20 bill, the building owner only sees a penny or a dime. Is it really worth the time and effort to pick it up? For the building owner, probably not. Especially if the building owners sees much bigger bills lying around elsewhere, like in lobby upgrades for example. Of course, it’s easy to imagine how someone with a vacuum could make a lot of money from picking up all those pennies or dimes, but that doesn’t mean very much to any given building owner.
- Maybe the $20 bill isn’t really sitting on the sidewalk at all. Actually, it’s sitting inside the owners building. So unlike the bill on the street, that is free for anyone to pick up, the bill in the owners building requires the cooperation of the owner. As we’ve mentioned before, without the owner (or at the very least his agent) on board, there is no energy efficiency project. Put differently, there is a big difference between potential and opportunity. Potential is the apparent market size – the value that, say, a McKinsey would see when looking at a market. Opportunity, on the other hand, is the near-term, accessible investment that a building owner could seek to capture. As we and our readers all know, there is enormous potential for energy efficiency, but many building owners have trouble seeing the actionable opportunity. It’s as if the $20 bill were behind a one way mirror, and building owners are only staring at themselves. It’s still there, but only the energy efficiency advocates on the other side can see it. And until the owner sees it and decides to pick it up, it is stranded from everyone.
None of this should be new to any of our loyal readers. But the $20 bill story is useful for thinking about efficiency because it strips away a lot of the fluff around energy efficiency and allows for the focus to be on the core economic decisions and incentives that building owners respond to. It also helps support our viewpoint that generally speaking, markets have worked; there are rational, explainable reasons why building owners either don’t see bills lying on the ground or dont think it worth the time and effort to bend down and pick them up.
When laid out like this, it also makes clear that overcoming these barriers isn’t all that hard. It really all comes down to a farily simple question: how do we cut through complexity and create incentives that get the building owner on board? Once that question is sorted out, then the old economists might finally be right – there probably won’t be many $20 bills left on the street.