December 18, 2017

Saying no to energy savings

Economics is helping to explain the energy-efficiency gap.

Two electric cars charging in Moscow, Russia


Whether replacing a light bulb or buying a car, investing in energy-efficient products can help people to reduce their carbon footprint while saving money. So why do consumers still opt for energy-inefficient goods?

In a new paper in the December issue of the Journal of Economic Literature, co-authors Todd Gerarden, Richard Newell, and Robert Stavins explore why people are slow to switch — even when it’s in their best interests to do so.

They examine two versions of the “energy-efficiency gap.” The first is the gap between what makes financial sense for individuals and what people actually do. For example, people sometimes buy inefficient appliances with a low up-front purchase price that, due to higher energy costs, are ultimately more expensive than energy-efficient appliances. The second is the gap between what people do and what is best for society and for the planet. If the cost of gasoline does not include its environmental and health impacts, some people will continue to buy SUVs at the expense of everyone affected by pollution.

Historically, these gaps have puzzled researchers and policymakers. After all, individuals and businesses could get the same services using less energy. The technology exists; people just don’t adopt it. As economists have joined this research, they have shed light on this paradox by introducing the idea of economic efficiency: can people get the same services using less energy while minimizing costs?

[E]conomics can help identify the lowest-cost approach to achieving [carbon emission reduction targets].

Robert Stavins

The answer is often no, the authors find. In some cases, market failures prevent product prices from being economically efficient. For example, if consumers do not have enough information about energy-efficient products, then they may not be willing to make the investment. Labels, such as Energy Star logos or LEED certification, can help to remedy this informational failure. Other market failures distort operating costs. In the case of externalities, unaccounted-for environmental impacts (like those of gasoline, as discussed above) result in artificially low energy costs.

Aside from market failures, behavioral explanations offer additional reasons why people underinvest. For example, consumers do not pay attention to energy costs if getting that information is difficult. Switching to energy-efficient light bulbs requires researching light bulb brands, calculating energy savings, and searching for the bulbs in the store, all of which cost time and attention. People may not bother to do this research, which then influences their buying decisions.

Finally, some studies have had modeling flaws. When researchers ignore seemingly small costs, they may overstate the extent of the gap. These trivial costs — even adjusting to the color of an energy-efficient light bulb — can actually matter. Once researchers incorporate these costs into their models, the energy-efficiency gap may not be as large as it seems.

The authors examine these explanations and many more, as shown in the visualization below. Some explanations are stronger than others, but as a whole, it is clear that the energy-efficiency gap is not a mystery. Rather, it is a product of modeling issues and real barriers that prevent reasonable people from adopting energy-efficient technology.

Explaining the Gap
The innermost tier contains the four overarching questions that the authors ask. The middle tier categorizes the potential explanations for each question into market failures, behavioral explanations, and modeling flaws (as in the paper). The outermost tier briefly describes each potential explanation. 
Source: Gerarden et al. (2017)


Addressing these barriers would save people money, but it also has broader implications. Energy generation, distribution, and use result in carbon emissions, one of the largest contributors to global climate change. As countries strive to meet international goals for carbon reduction, they must invest in energy efficiency and make it easy for businesses and individuals to adopt appropriate technologies.

This work can happen on political and academic fronts. Policymakers can support fuel efficiency standards (which are currently in the process of being rolled back) and implement carbon taxes. Researchers can complement theoretical work on energy efficiency with more empirical work, especially on understudied sectors. Currently, most research has been directed toward homes and vehicles, even though the commercial and industrial sectors have substantial energy needs as well.

Energy-efficiency gaps do not exist as often as once thought. In some cases, flawed analyses have simply overstated the extent of the gaps. But when they do exist, economics can help explain them and suggest ways to close them. Policymakers can then use these insights to better address energy efficiency issues.

Climate change is “a very important problem, and it is going to be very costly to address — to achieve the kinds of targets that scientists talk about,” says Stavins. “Economics can help us identify what are sensible targets. But no matter what those targets are, economics can help identify the lowest-cost approach to achieving them.”

Assessing the Energy-Efficiency Gap appears in the December issue of the Journal of Economic Literature