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A Commitment Device for Energy Conservation—A Commentary by Ian Ayres ’86

The following commentary was published in The New York Times on November 14, 2008.

A Commitment Device for Energy Conservation
By Ian Ayres ’86

There’s lots of evidence that commitment contracts can help people change behavior with regard to all kinds of things (like savings and smoking cessation). But since participation is voluntary, a huge question is whether you can get people to sign up. This is more than an academic question for me, since the answer will help determine the success of, a commitment store that I co-founded earlier this year.

One theory is that the demand will be limited to people who have a willpower problem and are self-aware enough to know they have a willpower problem.

In a post on voting commitments, I argued that even people without willpower problems might enter into commitment contracts as a way to credibly signal their commitment to others.

I just published an article in Forbes with Barry Nalebuff that extends this signaling idea to conservation commitments:

The Chicago Climate Exchange is an unusual free market experiment in which companies that want to demonstrate a true commitment to reducing their greenhouse emissions pledge to lower them by 1 percent a year. If they surpass that goal, they end up with permits they can sell to others. If they fail, they are penalized by having to buy permits.

What is unusual is that no one forces anyone to join the exchange. Participation is voluntary. But once a business has signed up, it is contractually obligated to buy or sell permits based on its performance. A company that beats the 1 percent goal gets both good publicity and a financial reward, and the specter of the potential penalty helps it reach that goal.

Why not offer the same opportunity to individuals? You could contract to reduce your home energy consumption by 1 percent a year for each of the next ten years. When you beat that target, you’d get permits to sell. When you miss, you’d pay a penalty by buying unused permits from others. As a result, your incremental price of fuel would go up. Every extra Btu you use would mean fewer permits to sell or more to buy.

People might volunteer for effective tax increases because they want to signal to their neighbors that they’re really green. They might also want to change their incentives and strengthen their willpower to conserve.

But others might do it for the most traditional economic rationale of all — to make money by selling excess credits to those who fail to meet their goal.