Air-conditioning has been getting a lot of mainstream media attention of late. It has been variously called “one of the world’s great overlooked industries” by The Economist, “a life-saver — and a danger” by Time, and “the next big equality issue” by The Guardian.

As two people who have spent most of their careers working on the challenge of cooling and energy efficiency, the attention seems overdue. Even as recently as the Paris climate negotiations, the threat represented by this technology was massively underestimated. Since then, researchers at the Lawrence Berkeley National Laboratory and the International Energy Agency have established that air-conditioning represents one of the single biggest end-use risks to our climate.

The use of energy for cooling buildings has more than tripled between 1990 and 2016, with nearly 70 percent of this increase stemming from the residential sector. According to Solving the Global Cooling Challenge, a new report by the Rocky Mountain Institute, room air conditioners (RACs) — the typical window and split units used in most homes — are estimated to increase from 1.2 billion units worldwide today to 4.5 billion units by 2050. Most of this growth will come from emerging economies.

This has major implications for the climate. RACs alone are set to emit over 130 gigatons of carbon dioxide between now and 2050. To put this in perspective, if we turned the entire global population vegetarian overnight, replanted two-thirds of our degraded tropical forests, and doubled the world’s bicycle commuting it would just barely neutralize the negative impact from this one piece of technology.

Source: Rocky Mountain Institute, Solving the Global Cooling Challenge

To tackle this issue, the government of India, Mission Innovation and Rocky Mountain Institute today announced the launch of The Global Cooling Prize, an international competition to incentivize the development of a residential cooling technology that will have at least five times less climate impact than standard RAC units. More than $3 million will be awarded in prize money over the course of the two-year competition. Up to 10 shortlisted technologies will be awarded up to $200,000 each in intermediate prizes to support the design and prototype development of their innovative residential cooling technology designs.

But how did we get to this point? How did such a vital service turn out to also be so damaging? For the answer, you need to understand how the RAC market is structured, and the market failures that drive the behavior and decisions of the big RAC companies.

AC market failures

The first of these market failures is a familiar one to environmental economists: The cost of manufacturing an AC does not fully reflect the costs they impose on electricity systems, society and the planet. The 130 gigatons in anticipated RAC emissions would account for between 20 and 40 percent of the world’s remaining “carbon budget” (the most we can emit while still keeping global warming to less than 2 degrees Celsius above pre-industrial levels, which is the Paris goal).

Electricity grids in countries like India and Indonesia are already straining at their limits, and rapidly increasing cooling demand will make things a lot worse. Between them, India and Indonesia could require over 600 gigawatts of new generation capacity to serve this new demand, much of it based on the burning of fossil fuels. This represents hundreds of billions of dollars in public capital that could be spent on schools, clinics, roads, or other essential public goods.

The second market failure is equally familiar to behavioral economists: Consumers don’t make economically rational buying decisions. That is, their purchase decisions are based primarily on the sticker price or “first cost” of the RAC unit, not on its “total cost of ownership” (the costs associated with owning and running something over its full life).

This happens for one of three reasons. First, they aren’t aware of those future costs. Either they don’t know that a cheaper unit will end up costing more over the long term, or they discount those future costs really heavily — meaning they know a cheaper unit will ultimately cost more, but they don’t care. Or they don’t have the cash to buy anything but the cheapest unit, because they lack access to capital or financing.

Meanwhile, regulators continue to permit AC companies to make and sell inefficient RACs. Most countries that have “minimum energy performance standards” are not ambitious enough, and many countries have no such standards at all.

The good news

As profit-driven enterprises, room AC makers respond to both regulatory and market signals. Consumers care about brand and price more than anything else, and regulators fail to apply much pressure, so these companies often spend more on advertising and aesthetics than they do on R&D, and they continue to churn out as many minimal efficiency RACs as they can, as cheaply as they can.

The good news is that these market failures are addressable. Policymakers generally have two major tools with which to address negative “externalities” like the social and environmental costs imposed by RACs. They can impose taxes that reflect these hidden costs, or they can impose regulations that force RAC manufacturers to alter their behavior. We favor the latter option; specifically, that regulators around the world raise minimum energy performance standards closer to those of “best-in-class” RAC units, which are typically twice as efficient as the market norm.

The industry will complain noisily about how this will result in higher prices and hurt consumers. Don’t believe it. Regulators in Japan and South Korea have been aggressively raising standards only to see AC companies meet them, while also continuing to drive down prices. Japan also rewards companies that exceed its standards by giving them a special “Top Runner” efficiency rating.

Government procurement agencies and large private-sector buyers (like real estate developers) can help keep prices low by leveraging their buying power in the form of advance market commitments and bulk procurement programs for super-efficient ACs. India’s UJALA program, for example, which procured millions of LED light bulbs on behalf of the government, helped drive down the cost of LEDs by about 80 percent over the course of four years. In the interest of saving taxpayer dollars and delivering value to their customers, it makes perfect sense for governments and developers to procure the products with the lowest life-cycle costs.

On the consumer side of the equation, simple financing solutions can encourage people to buy more efficient ACs. Forward-thinking utilities, for example, can offer “on-bill” financing, which allows consumers to pay for energy-efficient ACs on their electricity bills and in installments — enabling them to realize cash savings from the very first day. This would be particularly effective when combined with a robust communications program, and especially more straightforward and informative “eco-labeling.”

At the moment, consumers are forced to rely either on simplistic “star” ratings that fail to convey critical information, or an alphabet soup of technical metrics such as EER, SEER, COP and IPLV that are only comprehensible if you have an advanced degree in thermodynamics.

Philanthropically supported challenges and prize competitions can help raise the technology ceiling. Given its limited investment in innovation to date, the RAC industry has lots of headroom for improvement; the compressor technology at the heart of most RACs has barely reached 14 percent of its theoretical maximum efficiency. The recently announced Global Cooling Prize could help obscure but promising technologies find an audience, bypassing traditional channels to market that are largely blocked by established manufacturers. It could also spur complacent incumbents into more ambitious action — succeeding where more incremental regulatory approaches have failed.

We need to do all of these things to address the cooling challenge and shake up an entrenched industry. But if we do, it could amount to the single biggest technology-based intervention we can make to address global warming.

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Iain Campbell is a Senior Fellow at Rocky Mountain Institute, where he is dedicated to scaling sustainable and innovative cooling solutions across the globe. He was formerly managing director of RMI’s buildings practice, head of Johnson Controls’ Global Energy & Workplace Solutions businesses, and the president of York International, Americas.

William Sisson, an MIT Sloan Fellow, is a sustainability consultant focused on improving energy and environmental performance in the private and public sectors. He is the retired senior sustainability director for the United Technologies Research Center, and the former global products manager for commercial controls for the Carrier Corporation.