Energy efficiency subsidies with price-quality discrimination

Abstract

We compare various designs of energy efficiency subsidies in a market subject to both energy-use externalities and price-quality discrimination by a monopolist. We find that differentiated subsidies can establish the social optimum. Unlike per-quality regimes, ad valorem regimes generate downstream interferences: Subsidising of the high-end good leads the monopolist to reduce the quality of the low-end good. For this reason, ad valorem differentiated rates should always decrease with energy efficiency, a result seemingly at odds with actual practice. In contrast, with per-quality differentiated subsidies, the rates can increase if the externality is large enough relative to the market share of "low" type consumers. Contrary to differentiated subsidies, what we shall call single-instrument subsidies only achieve second-best outcomes. A uniform ad valorem subsidy should have a rate higher than that needed to specifically internalise energy-use externalities. Lastly, if, as is often observed in practice, only the high-end good is to be incentivised, a per-quality regime should be preferred to an ad valorem one. An ad valorem tax on the high-end good may even be preferred to an ad valorem subsidy if the externality is small enough and low-end consumers dominate the market.

Energy efficiency as a credence good: A review of informational barriers to energy savings in the building sector

“…A multiproduct seller having market power but no ability to screen consumer's types has an incentive to under-provide quality at the low-end of the product line so as to maintain high mark-ups on the sales of high-end products (Mussa and Rosen, 1978). If energy efficiency is the relevant dimension of quality, those distortions result in too little energy efficiency at the bottom of the product line (Fischer, 2005;Nauleau et al, 2015). 8 Houde (2018b) exploits changes in the ENERGY STAR label in the US market for refrigerators and finds adjustments in the product line that are consistent with price discrimination.…”

“…In this regard, it is worth mentioning that the French Anti-trust authority ruled against high concentration levels in the heating, air conditioning and hot water industry. 9 Second, when energy efficiency investments are targeted by public subsidy programs, the regulator can address the distortions due to price discrimination by carefully adjusting subsidy regimes, for instance by offering more generous subsidies for low-end products than for high-end ones (Nauleau et al, 2015). Despite restoring efficiency in the provision of quality, this approach raise equity concerns in that it compensates energy efficiency suppliers for the deadweight loss they otherwise cause.…”

Lump-sum vs. energy-efficiency subsidy recycling of carbon tax revenue in the residential sector: A French assessment

“…In particular, they are the main approach taken by energy suppliers to comply with energy saving obligations, also known as white certificates (Giraudet and Quirion, 2008). Theoretical works moreover suggest that, in industries like energy efficiency characterized by a low degree of competition, performance-based subsidies cause less distortion than do ad valorem ones (Nauleau et al, 2015). 11 In addition, we assume by default that subsidy recipients are property owners -owneroccupiers, private landlords and social housing managers.…”

“…Another merit is that subsidy programmes are more likely to be supported by energy efficiency industries than are lump-sum payments. Though rent extraction might be a concern, it should be limited by specifying subsidies in proportion to energy efficiency improvements, rather than ad valorem (Nauleau et al, 2015).…”

Formulating Interest Subsidy Program to Support the Development of Electricity Generation from Palm Oil Mill Effluent (POME) Biomass: An Indonesian Case Study

“…Another study by Sun et al [4] investigates subsidies on household biogas use in China, while a study by Gharibnavaz and Waschik [5] investigate the food and energy subsidy reform in Iran. Nauleau et al [6] argue that subsidy should be differentiated to achieve the social optimum. Chen et al [7] propose a sewage charge to encourage producers' emphasis on dung disposal.…”