Market failures, consumer preferences, and transaction costs inenergy efficiency purchase decisions

Abstract

Several factors limit the energy savings potential and increase the costs of energyefficient technologies to consumers. These factors may usefully be placed into two categories; one category is what economists would define as market failures and the other is related to consumer preferences. This paper provides a conceptual framework for understanding the roles of these factors, and develops a methodology to quantify their effects on costs and potentials of two energy efficient end uses -residential lighting and clothes washers. It notes the significant roles played by the high implicit cost of obtaining information about the benefits of the two technologies and the apparent inability to process and utilize information. For compact fluorescent lamps, this report finds a conservative estimate of the cost of conserved energy of 3.1 cents per kWh. For clothes washers, including water savings reduces the cost of conserved energy from 13.6 cents to 4.3 cents per equivalent kWh. Despite these benefits, market share remains low. About 18 million tons of CO 2 could be saved cost effectively from 2005 sales of these two technologies alone. The paper also notes that trading of carbon emissions will incur transaction costs that will range from less than 10 cents per metric ton of CO 2 for larger size projects and programs to a few dollars per metric ton of carbon for the smaller ones. Executive SummaryTwo general approaches have been used for the assessment of energy demand and supply -the so-called "bottom-up" and "top-down" approaches. The bottom-up approach focuses on individual technologies for delivering energy services, such as household durable goods and industrial process technologies. The top-down method assumes a general equilibrium or macroeconomic perspective, wherein costs are defined in terms of changes in economic output, income, or GDP, typically from the imposition of energy or emissions taxes.The bottom-up approach assumes that various factors prevent consumers from taking actions that would be in their private self-interest, that is, would result in the provision of energy services at lower cost. These factors include lack of information about energy efficiency opportunities, lack of access to capital to finance energy efficiency investment, misplaced incentives which separate responsibilities for making capital investments and paying operating costs, hidden costs, transaction costs, bounded rationality, and product unavailability.The thrust of this work thus focuses on the development of a bottom-up approach that (1) accounts for all costs of a mitigation option, including non-energy and transaction costs, and (2) allows for representation of the impact of each factor on a cost component and/or the penetration level of a mitigation option. We focus on energy efficiency options and the representation of their marginal cost curves, typically referred to as cost of conserved energy (CCE) curves, using the costs and benefits faced by consumers.We illustrate the use of our factors approach by demonstr...

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