A Tax Break for Energy Efficient Appliances?

People prefer carrots over sticks, so it is no surprise that governments prefer to offer consumers incentives rather than implementing pigovian taxes. But are they as effective?

One such consumer incentive has been annouced by the government of Ontario. The Canadian Press article Ontario offers tax break for buying green products discusses the plan:

The province is giving a tax break to people who buy certain energy-efficient products.

Starting July 19, anyone who buys Energy Star light bulbs and appliances won't be charged provincial sales tax at the till.

The basic idea here is that by avoiding the 8% sales tax, consumers will purchase more energy efficient appliances, which will reduce the amount of electricity used by Ontarians. But will this plan make a difference? It may not. Consider the case of refridgerators, and three possible scenarios for consumers:

1. The consumer would have bought the energy efficient refridgerator anyway - Here the plan's only impact is to leave more money in the consumer's pocket.
   
   
2. The consumer would have bought a non-energy efficient refridgerator, but instead bought an energy efficient one - Here there is a cost savings in energy.
   
   
3. The consumer was not planning on purchasing a refridgerator, but with this new incentive decides to purchase an energy efficient refridgerator - Then the impact on energy use is not so clear. First we need to consider the whole lifecycle impact. Does the reduction in energy use at the consumer end outweigh the energy used to manufacture and ship the refridgerator? Plus, what happens to the old refridgerators? It is unlikely that they will all be destroyed - many will be used as secondary "beer fridges". Even if the new fridges are twice as energy efficient, if more than half of the old refridgerators end up staying in the system, then there is an increase, not a decrease, in energy use at the consumer level.

Overall it is unclear what the overall impact of the policy will be - it could lower energy use, but it could also increase it because of factor 3. Then there is the added compliance costs placed on retailers. (Full disclosure: I am part-owner of a regulatory compliance consulting firm) Finally, there is a reduction of government revenue which necessitates higher levels of distortionary taxes, such as income and corporate taxes.

Economically, the policy looks like a loser compared to Pigovian taxes on polluting forms of electricity. But politically? It's likely a winner.