What steps can – and should – local, state and federal governments take to encourage energy conservation?
People appear to underinvest in many energy-efficiency measures that engineering cost studies find more than pay for themselves in the energy savings they yield. Explanations for this puzzle—known as the “energy paradox” or “energy efficiency gap”—seem to fall into three categories: missing costs, market failures and behavioral factors. Missing costs can include things like transaction costs, time costs and unsatisfactory product characteristics that don’t get counted in engineering calculations. Market failures often revolve around missing information– i.e., people just don’t know enough about what options are available to make wise energy choices. And behavioral issues encompass an array of factors about how and why people make choices that don’t fit a traditional optimization framework.
In light of the efficiency gap and our still-limited understanding of the reasons for it, the best approach for now might be one that focuses on direct information provision to households and businesses, sometimes accompanied by a “nudge.” Studies of OPower experiments in which information is combined with a social norms message, such as a comparison of a household’s energy use to its neighbors, found that energy use was reduced by about 1.5% to 3% (see research by NYU’s Hunt Allcott and coauthors on this topic). Similar “nudges” have been found to be effective in many settings. Other information programs and policies might also be worthwhile but we need a better understanding of how people respond to different kinds of information and what really works. Information programs can include product labels, such as the “Energy Guide” on appliances; voluntary certification programs such as Energy Star; energy audits; building energy disclosure and benchmarking requirements (such as recently adopted in New York City, Washington, DC, and some other cities); opportunities for property energy characteristics to be considered in mortgage underwriting; and a host of other options that focus on making energy use and costs more transparent.
But we don’t know enough about what works to adopt sweeping policy changes at this time. What we need is far more rigorous analysis of the costs and effectiveness of existing policies, ex post evaluation integrated into the design of new policies and programs (too often this is not the case), and more controlled experiments to better understand what really works in different settings. And we need a greater understanding of behavioral factors and less focus on engineering estimates. If people don’t buy compact fluorescent lightbulbs, use a programmable thermostat or install attic insulation even though engineering cost calculations suggest the energy savings benefits outweigh the costs, the proper response is not to mandate or subsidize these options. We should instead seek to understand why people make the choices they do. The U.K. government understands that: They have established a “Behavioural Insights Team” (often called a “nudge unit”) that studies behavioral issues across a range of government policy concerns. Maybe this is the first step the federal government should take here.
My Resources for the Future (RFF) colleague, Karen Palmer, with coauthor Ken Gillingham of Yale University, has a recent paper that discusses behavioral factors and the energy efficiency gap. Other RFF research on a variety of energy efficiency issues can be found here.
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