Free Riding on Energy Efficiency Subsidies: The Case of Natural Gas Furnaces in Canada

Abstract

We assess the extent to which subsidies for home energy efficiency improvements in Canada have been paid to households that would have undertaken the improvements anyway-the so-called free rider rate. We focus on forced-air natural gas furnaces, replaced between April 1, 2007 and March 31, 2011, under both federal and provincial subsidy programs as well as the 2009 federal Home Renovation Tax Credit. Our results indicate that around 50 percent of expenditures under the Canadian subsidy and tax credit programs represented free riding. In the long run, our estimates suggest that over 80 percent of grant recipients would have chosen an identical furnace at the time of replacement. We estimate that the cost effectiveness of the programs in terms of greenhouse gas reduced was between $70 and $110/t CO 2 , depending on the assumptions made. Further, we find that a substantial majority of the grants were received by middle-and high-income households, such that the grant had a regressive effect on the distribution of income. We conclude that such grants are not an optimal way to improve residential energy efficiency.

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“…Moreover, government subsidies can effectively control the probability of free-riding. This is contrary to the conclusions of some studies, which stated that subsidies may increase the occurrence of free-riding [63,64]. This may be due to the fact that their formulation of subsidies is different from that presented in this paper.…”

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“…Davis et al (2014) also use a matching methodology to evaluate a program in Mexico that subsidized replacement of refrigerators and air-conditioning units and find that while refrigerator replacements reduced electricity consumption by 8 percent on average annually, air conditioner replacements actually increased electricity consumption, again consistent with a rebound effect. Rivers & Shiell (2016) examine Canadian subsidies for natural gas furnace retrofits and find strong evidence of free riding, estimating that in the long run, over 80 percent of subsidy recipients would have eventually purchased identical furnaces without a subsidy.…”

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“…Using survey data, Allcott et al (2015a) show that the majority of households benefitting from conservation subsidies are wealthy environmentalist homeowners. Rivers and Shiell (2016) find likewise that recipients of a gas furnace replacement scheme in Canada are in large parts middle-and high-income households.…”

“…Around 50% of households are found to be inframarginal adopters, no hidden costs of adoption assumed. Rivers and Shiell (2016) assess the proportion of inframarginal households who adopt a natural gas furnace replacement scheme in Canada. They find that around 50% of adopters would have replaced their gas furnace even in absence of the scheme.…”