39 Pages Posted: 23 Jan 2012 Last revised: 24 Sep 2013
Date Written: July 19, 2012
Many analysts have argued that energy efficiency investments offer an enormous “win-win” opportunity to both reduce negative externalities and save money. This overview paper presents a simple model of investment in energy-using capital stock with two types of market failures: first, uninternalized externalities from energy consumption, and second, forces such as imperfect information that cause consumers and firms not to exploit privately-profitable energy efficiency investments. The model clarifies that only if the second type of market failure cannot be addressed directly through mechanisms such as information provision, energy efficiency subsidies and standards may be merited. We therefore review the empirical work on the magnitude of profitable unexploited energy efficiency investments, a literature which frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured. These problems notwithstanding, recent empirical work in a variety of contexts implies that on average the magnitude of profitable unexploited investment opportunities is much smaller than engineering-accounting studies suggest. Finally, there is tremendous opportunity and need for policy-relevant research that utilizes randomized controlled trials and quasi-experimental techniques to estimate the returns to energy efficiency investments and the welfare effects of energy efficiency programs.
Keywords: Energy efficiency, market failures, externalities, energy policy, imperfect information, investment inefficiencies
JEL Classification: D11, D18, D61, D62, H23, L91, L94, Q41
Suggested Citation: Suggested Citation
Allcott, Hunt and Greenstone, Michael, Is There an Energy Efficiency Gap? (July 19, 2012). MIT Department of Economics Working Paper No. 12-03. Available at SSRN: https://ssrn.com/abstract=1987250 or http://dx.doi.org/10.2139/ssrn.1987250
By Lucas Davis