To understand today’s topic, consider a hypothetical. Imagine that you are buying a new car and considering its fuel efficiency. You want to spend less on gas, so you might buy a more efficient car, but then you find out that instead of gas stations charging you for how much gasoline you buy, they will instead charge you a flat fee based on your income, and then let you buy gasoline for just $0.50 a gallon. Now what kind of car are you buying? This might sound like a crazy way to run a gas station, but it mirrors new proposals in California to charge electricity consumers based on their income.

Putting aside whether it’s even feasible for California utilities to track the household income of all their customers, the thinking behind the proposal is that California utilities have high costs that need to be recovered and they want wealthy households to pay a greater share of the cost. They also want to shift more of their cost recovery to fixed costs on bills and less from charges on how much electricity is consumed. The result is that high-income households must pay large, fixed costs on their electricity bills no matter how much electricity they consume. And, ironically, the per kilowatt hour (kWh) cost of electricity would be lower after the change, even though the total electric utility bill would be higher for many households.

Three bad outcomes will result from the implementation of this proposal. The first is that electricity consumption will rise. If households must pay high costs regardless of how much electricity they consume, and if consuming more only has a marginal impact on utility bills, then households will likely start consuming more. This is bad because producing electricity is not free. The whole point of charging consumers based on what they consume is to incentivize reduced consumption. The result of California’s proposal would result in the opposite, meaning that as the demand for electricity rises, California may have to build more power plants and incur greater costs in delivering power, forcing them to raise fees in the future.

The second bad outcome is that the proposal would increase pollution. When electricity is generated, there’s usually some externality involved. About 40 percent of California’s electricity comes from fossil fuels, so there should be no doubt that increasing electricity demand will also increase the demand for fossil fuels, and thus their associated pollution.

The third bad outcome is that the policy would kill any incentive for wealthy households to live in an eco-friendly manner. One interesting analysis found the households that would have the greatest increase in their utility bills are the ones that consume the least electricity. That is because many of these individuals live in apartments or may be striving for a climate-friendly, energy-efficient home with solar panels and batteries. Remember when California said that mandating solar panels in new homes would save customers money? Well, that’s not possible with this proposal.

In a nutshell, these are the kinds of problems that crop up when policymakers ignore economics. If we want people to consume electricity prudently and be more environmentally friendly, then the best way to do that is to make sure they pay the full cost of every kWh they consume. If the costs get shifted around, so too do the incentives, and these specific proposals would incentivize people to consume more. Surely California policymakers don’t intend to raise costs, consumption and pollution, so they ought to reject these proposals.

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