Assessing the Energy-Efficiency Gap

Abstract

The Harvard Environmental Economics Program (HEEP) develops innovative answers to today's complex environmental issues, by providing a venue to bring together faculty and graduate students from across Harvard University engaged in research, teaching, and outreach in environmental, energy, and natural resource economics and related public policy. The program sponsors research projects, convenes workshops, and supports graduate education to further understanding of critical issues in environmental, natural resource, and energy economics and policy around the world. acknowledgementsThe Alfred P. Sloan Foundation provided generous support for the research project on which this paper is based. ABSTRACTEnergy-efficient technologies offer considerable promise for reducing the financial costs and environmental damages associated with energy use, but these technologies appear not to be adopted by consumers and businesses to the degree that would apparently be justified, even on a purely financial basis. We present two complementary frameworks for understanding this socalled "energy paradox" or "energy-efficiency gap." First, we build on the previous literature by dividing potential explanations for the energy-efficiency gap into three categories: market failures, behavioral anomalies, and model and measurement errors. Second, we posit that it is useful to think in terms of the fundamental elements of cost-minimizing energy-efficiency decisions. This provides a decomposition that organizes thinking around four questions. First, are product offerings and pricing economically efficient? Second, are energy operating costs inefficiently priced and/or understood? Third, are product choices cost-minimizing in present value terms? Fourth, do other costs inhibit more energy-efficient decisions? We review empirical evidence on these questions, with an emphasis on recent advances, and offer suggestions for future research.

Internal and External Barriers to Energy Efficiency: Made-to-Measure Policy Interventions

“…According to Schleich et al (2016), internal barriers to energy efficiency are related to preferences and predictable (ir)rational behaviour. These factors are labelled "behavioural explanations" for the energy efficiency gap in the taxonomy provided by Gerarden et al (2017).…”

“…For example, behavioural economics assumes that people try to choose their best feasible option, and this is simply a variant of the optimization assumption (Laibson and List, 2015). For this reason, rather than labelling these behaviours as failures, it is now common to refer to "behavioural explanations" for the energy efficiency gap (Gerarden et al, 2017).…”

“…The evidence is that agents underinvest in energy-efficient technologies with adoption rate of households and firms being too low. The concept of "private energy-efficiency gap" also called "energy paradox" describes precisely the fact that some energy-efficient technologies are not adopted despite the savings they entail (Gerarden et al, 2017). 1 The low level of investment in energy efficiency technologies translates into high implicit discount rates.…”

Industrial Investments in Energy Efficiency: A Good Idea?

“…energy efficiency gap). While market failures or behavioral theories are popular explanations (Allcott and Greenstone (2012), Gerarden et al (2015), Gillingham and Palmer (2014)), recent investigations have gone into the direction of understanding the relationship between projected and realized returns. Through conducting an experimental study, Fowlie et al (2015) shows that projected savings to the investments made in the nation's largest residential energy efficiency program are 2.5 times greater than the realized savings.…”

DoEnergyEfficiencyInvestmentsDeliver?EvidencefromtheWeatherizationAssistanceProgram

“…Over the last three decades, a wide variety of explanations have been offered for this apparent failure of consumers to avail themselves of profitable investment opportunities. The most popular explanations have emphasized the possibility of market failures, such as imperfect information, capital market failures, split incentive problems, and behavioral explanations, including myopia, inattentiveness, and prospect theory and reference-point phenomena (see, for example, Allcott and Greenstone, 2012;Gillingham and Palmer, 2014;Gerarden et al, 2015). In contrast, relatively little attention has been paid to the more pedestrian possibility that the real world returns on energy efficiency investments are lower than the engineering models indicate.…”