High Discount Rates, Inattention, and the Energy Efficiency Gap Across Income Groups Sébastien Houde Assistant Professor Department of Agricultural and Resource Economics University of Maryland March 29, 2016

The Energy Efficiency Gap A phenomenon that refers as the too slow adoption of energy savings technologies that would benefit consumers themselves and society.

One Potential Cause of the Energy Efficiency Gap Consumers defective telescopic ability to foresee future energy savings. As if consumers where discounting steeply future energy operating costs. Seemingly high discount rates have been the rationale for most energy efficiency/conservation policies that we are living with today.

The First Empirical Evidence of High Discount Rates: Hausman 1979 Data and Environment Purchase and utilization decision for room air conditioners 1985 US households across 16 cities, August 1976-July 1977 Results Average: 15-25% By Income Group $24,000 (N=6) 89% $40,000 (N=15) 39% $60,000 (N=16) 27% $100,000 (N=17) 17% $140,000 (N=8) 8.9% $200,000 (N=3) 5.1%

The Consensus of the 80s

Recent Evidence for the US Appliance Market Appliance category: full-size refrigerators Data: transaction level data from large appliance retailer (N>millions) Geography: all US Period: 2008-2011 Sample: Homeowners living in single family units and that bought no more than one refrigerator in the five year sample period

Decision Environment: Appliance Purchasing Decision

The Average Consumer by Income Group Discount Rate 80% 40% 22% Willingness to Pay for $30 $44 $57

Heterogeneity in Preferences for Energy Information

Income: <$50,000

Income: <$50,000 r=102% WTP=$220 r=13%

Income: [$50,000; $100,000] WTP=$340 r=5.6%

Income: >$100,000 WTP=$430 r=4.8%

Heterogeneity in Preferences for Energy Information Income: <$50,000 Income [$50,000; $100,000] Income: >$100,000 Informed (Low Discount Rate) 29% 46% 21% Energy Star Focus 14% 20% 18% Inattentive 57% 33% 61%

Take-Away Lower income households do have higher discount rates, but they are also much more likely to be inattentive to energy information. Subsidizing the price may not be as much important to finding ways to make energy costs more salient to these consumers. Minimum energy efficiency standards may be justified from a distributional point of view, more than from an economic efficiency point of view. Minimum standards protect lower income households from their own defective telescopic ability.

Thank you! shoude@umd.edu

The Average Consumer by Income Group Discount Rate 80% 40% 22% Willingness to Pay for $30 $44 $57 Probability to take advantage of rebates 20% 12% 5%