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New evidence supports the need for additional policy solutions to confront climate change while more field evidence is gathered to identify the most beneficial energy efficiency investments.
UNIVERSITY OF CALIFORNIA, BERKELEY’S HAAS SCHOOL OF BUSINESS—Energy efficiency investments are widely popular because they are believed to deliver a double win: saving consumers money by reducing the amount of energy they use, while cutting climate-forcing greenhouse gas emissions and other pollutants harmful to human health. But a new study by a team of economists finds residential energy efficiency investments may not deliver on all that they promise. Through a randomized controlled trial of more than 30,000 households in Michigan – where one-quarter of the households were encouraged to make residential energy efficiency investments and received assistance – the economists find that the costs to deploy the efficiency upgrades were about double the energy savings.
“Energy efficiency investments hold great potential as a means to fight climate change. However, we found that, at least in the case of residential energy efficiency investments, the projected savings overestimate the reality on the ground,” says Michael Greenstone, the Milton Friedman professor of economics and director of the Energy Policy Institute at the University of Chicago (EPIC). “A problem as urgent as climate change must be addressed using policies that deliver the greatest bang for their buck. As policymakers design climate policies, these findings suggest that a market-based approach that puts a price on carbon would likely be more effective. In the meantime, it is critical that we field test energy efficiency programs to determine which investments offer the greatest potential.”
The study – a part of The E2e Project and led by Greenstone, as well as Meredith Fowlie and Catherine Wolfram of UC Berkeley – assessed the nation’s largest residential energy efficiency program, the Federal Weatherization Assistance Program (WAP). Participating low-income households were provided with about $5,000 worth of weatherization upgrades (e.g. furnace replacement, attic and wall insulation, and weather stripping) per home at zero out-of-pocket costs. While the researchers found that the upgrades did reduce the households’ energy consumption by about 10 to 20 percent each month that only translated into $2,400 in savings over the lifetime of the upgrades – half of what was originally spent to make the upgrades, and less than half of projected energy savings.
“Energy efficiency programs are generally viewed as cost effective. This view is often based on engineering calculations and associated savings projections,” says Fowlie, an associate professor of agriculture and resource economics and Class of 1935 Endowed Chair in Energy at UC Berkeley. “Our data-driven analysis that measures the actual returns on energy efficiency investments shows how these projections can be quite flawed. In actuality, the energy efficiency investments we evaluated delivered significantly lower savings than the models predict.”
Past studies have claimed that energy efficiency investments don’t deliver the expected energy savings because of a ‘rebound effect’: households adjust their behaviors and consume more energy services than they had before the investments were made. However, the economists could find no evidence of this ‘rebound effect’ in the households they studied.
Further, some say that the broader societal benefits – savings as a result of reductions in pollution from energy production– justify the investments. Again, the findings did not support this. The cost per ton of CO2 avoided in the sample amounted to $329, significantly larger than the $38 per ton that the federal government estimates as the social cost of carbon.
Another claim is that energy efficiency programs have a low take-up rate because consumers don’t know about the programs or how to participate, driving down the expected benefits. To investigate this, the authors studied whether extensive outreach and assistance would boost the take-up rate of the program. Using a firm with extensive experience in managing outreach campaigns, the research team made almost 7,000 home visits, more than 32,000 phone calls, and 2,700 follow-up appointments. Yet, despite this aggressive outreach and personal assistance, only 6 percent of households in the treatment group participated in the program, compared to 1 percent in the control group. In the end, it cost more than $1,000 for each additional household encouraged to undertake these free energy efficiency investments.
“At the end of the day, the models don’t capture some of the hard-to-quantify costs involved in making energy efficient choices, which could help explain why people aren’t taking advantage of the opportunities as much as the models predict,” says Wolfram, the Cora Jane Flood professor of business administration at UC Berkeley’s Haas School of Business and faculty director at the Energy Institute at Haas. “This is another reason why potential energy efficiency investments need to be rigorously tested in real-world conditions before relying too heavily on them to solve climate change.”
This research was made possible thanks to generous support from the Alfred P. Sloan Foundation, the MacArthur Foundation, the Rockefeller Foundation, and the UC Berkeley Energy and Climate Institute.
About the Energy Institute at Haas (EI@Haas)
The Energy Institute at Haas brings together research and curricular programs on energy business, policy, and technology commercialization. The goal of EI@Haas is to bridge the gap between the frontiers of economic and scientific energy research and the marketplace. Through an economic lens, faculty at the Energy Institute at Haas probe the intricacies of energy markets and generate ideas to make them work better.