Guest Editorial: Change Credits to Benefit the Poor

As I have followed recent legislation, I have noticed a disconnect between current tax efforts and efficiency legislation. Legislation that is enamored with high individual system efficiency levels, which are not economically feasible, fails to spend taxpayer money effectively and does not benefit the masses. It seems that the political left is very concerned about not providing any tax breaks for the rich; however, U.S. energy policies seem to favor the rich over the poor.

The current energy policy only provides tax credits for very high efficiency equipment. As the HVAC equipment moves up in efficiency, so do the material costs. The heat exchangers become larger, and the control systems become more complex. Compare the installed price of a 16 SEER to a 13 SEER system - it’s almost double. Bells and whistles that add comfort rather than efficiency go into the premium equipment, along with higher margins for equipment and installation. All of this means that the tax credit support is not exclusively applied to efficiency.

And, as a result, many consumers who have older, lower-efficiency systems cannot take advantage of the 25C tax credits because they simply cannot afford the premium equipment.

The mindset seems to be that higher efficiency means more energy will be saved. This is only true if the systems are actually purchased and installed properly. Far more energy could be saved by transitioning the masses to systems that are slightly higher in efficiency.

To illustrate this, I will use some simple ratios and assumptions. My premise is that, if tax credits must be given, then a tiered replacement program (at the same cost of the 25C program) would produce more efficiency and be a wiser use of taxpayer money.

The first ratio is that a 16 SEER system install will cost twice as much as a 13 SEER basic system install. With that in mind, let’s assume that twice as many people can afford the 13 SEER system.

Now let’s turn to performance. First, we’ll assume that all systems achieve their full SEER ratings in the field. Let’s also assume that, in this replacement program, a 16 SEER system will replace a 13 SEER system, and a new 13 SEER system will replace a 10 SEER system. And, for this example, let’s assume that the average replaced system has a capacity of 36,000 Btuh.

This means that the 16 for 13 SEER swap saves about 520 watts. The 13 for 10 SEER trade saves about 830 watts - plus it happens twice as often. The power savings ratio per tax credit dollar would be:

(830 x 2) / 150 = 320 percent.

If you replace my ratios and assumptions, you will still show substantial benefit to be gained from bringing the masses up to the federal minimum efficiency. In fact, one 16 SEER for 10 SEER swap (1350 watt) will save less energy than two 13 SEER for 10 SEER swaps (830 x 2 = 1660 watts).

The 25C tax credit program was not put together very wisely. The 13 and 16 SEER systems require nearly identical labor for both manufacture and installation. That means more jobs are created only when there is higher volume. In contrast, a well-designed policy would have significantly reduced U.S. energy usage, produced jobs, and increased the tax base through increased employment.

Additionally, the higher efficiency levels of the 25C tax credit program caught manufacturers by surprise when they were introduced because there was relatively little demand for target equipment. Now that the 25C tax credits have been reduced for 2011, the price to the consumer will revert to near its real level. Consequently, the market will revert to lower price, lower efficiency installations. Manufacturers have de-prioritized this segment for two years and base systems are not as price competitive as they would have been under normal market pressures.

It’s simple: Give a tax credit for replacing a lower efficiency system over six years old. The poor as well as the rich can benefit.

Publication date: 03/07/2011