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

41 Pages Posted: 2 Oct 2015

See all articles by Nicholas Rivers

Nicholas Rivers

University of Ottawa - Graduate School of Public and International Affairs

M. Leslie Shiell

University of Ottawa - Department of Economics

Date Written: August 13, 2015

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 CO2, 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.

Keywords: energy efficiency, home retrofit subsidies

JEL Classification: D12, Q48

Suggested Citation

Rivers, Nicholas and Shiell, M. Leslie, Free-Riding on Energy Efficiency Subsidies: The Case of Natural Gas Furnaces in Canada (August 13, 2015). Available at SSRN: https://ssrn.com/abstract=2667600 or http://dx.doi.org/10.2139/ssrn.2667600

Nicholas Rivers (Contact Author)

University of Ottawa - Graduate School of Public and International Affairs ( email )

75 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

M. Leslie Shiell

University of Ottawa - Department of Economics ( email )

200 Wilbrod Street
Ottawa, Ontario K1N 6N5
Canada

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