Evaluating the Slow Adoption of Energy Efficient Investments: Are Renters Less Likely to Have Energy Efficient Appliances? December 2009 Lucas W. Davis UC – Berkeley Haas School of Business

Motivation Energy plays a central role in determining our overall economic well-being. It is crucial that energy be priced appropriately to encourage efficient choices, within and across energy sources. Also crucial are choices about the adoption of energy-efficient technologies.

Introduction While public discussion of HR 2454 (the ``Waxman-Markey’’ bill) has focused on the cap-and-trade program for carbon emissions, the bill also includes provisions that would tighten energy efficiency standards for household appliances.

Does it make sense to use standards in conjunction with cap- and-trade? What is the economic rationale for standards? Supporters of standards argue that they address additional market failures that would not be solved by cap-and-trade. Principal Agent Problems Information Problems Positive Externalities from Adoption Behavioral Biases

Landlord-Tenant Problem The principal (the tenant) is hiring the agent (the landlord) to provide housing services. Problems arise, however, because the two parties have difference incentives. Although in theory investments in energy-efficiency could be passed on in higher rents, it may be difficult for landlords to effectively convey this information. The overall magnitude of this market failure may be large.

This Paper The landlord-tenant problem has been widely discussed. Blumstein, Krieg, and Schipper (1980); Fisher and Rothkopf (1989); Jaffe and Stavins (1994); Nadel (2002); Gillingham, Newell and Palmer (2009) However, the available empirical evidence is very limited. This paper compares ownership patterns between homeowners and renters.

Preview of Findings Renters are significantly less likely to have energy efficient refrigerators, dishwashers and clothes washers. Differences range from 3-10 percentage points. For example, 9% of homeowners own front-loading clothes washers, but only 2% of renters. This pattern is apparent whether or not one controls for household income, demographics, energy prices, weather, and other controls. Nationwide implies annually 7.2 trillion btus of excess energy consumption and 125 thousand tons of excess carbon emissions.

Residential Energy Consumption Survey Nationally representative, in-home survey Conducted every 4-5 years by DOE since 1978 Most recent wave 2005 Detailed information about appliances used in home Demographic characteristics including household income Accurate information about energy prices and consumption

Estimation Sample We exclude households whose utilities are included in the rent because the incentives are very different in this case. This is 13% of renters (4% of all households) – unfortunately too few for separate analysis. Using RECS, Levinson and Niemann (2004) test whether energy use is higher when landlords pay for utilities, finding that tenants in these units set their thermostats between 1 and 3 degrees higher during winter months when they are not at home.

“Is your refrigerator an energy star appliance?” Beginning in 2005 households were asked whether or not their appliances were “Energy Star”. Since 1992, “Energy Star" standards have been established for most major appliances, designating the most energy efficient appliances in a particular class. The program is voluntary but all major manufacturers participate and labels are typically prominently displayed. This question was asked for refrigerators, dishwashers, room air conditioners, and clothes washers.

Evaluating Alternative Explanations – Homeowners have better information about Energy Star – Differential Depreciation Rates – Omitted Variables

The Implied Total Social Cost What is the overall magnitude of the landlord-tenant problem? In the U.S. there are 29 million rental housing units, so the total social cost of this market failure is potentially large. Using existing estimates in the literature we measure the implied total energy consumption, expenditure, and carbon emissions.

Additional Discussion Basing these measures on average energy consumption is likely to be conservative because adopters will tend to have higher utilization levels and energy prices than non-adopters. In addition, using average energy consumption for non- Energy Star is likely conservative because landlords may be systematically choosing very inefficient appliances. This is only for four major appliances and the landlord-tenant problem extends to a broader class of appliances as well as to the energy-efficiency characteristics of the housing units themselves (e.g. windows, doors, and insulation).

Policy Implications Although the evidence for the landlord-tenant problem is fairly clear, the policy implications are not. Landlords do not face the marginal cost of energy, so the Pigouvian approach does not work. Appliance standards ``solve’’ the problem by obligating all landlords to purchase energy-efficient appliances. However, concerns about heterogeneity and the “Gruenspecht effect” imply that this standards must be applied judiciously.

Alternatives to Standards One possibility would be to require large landlords to buy a certain fraction of Energy Star appliances. This could be enforced via audits. Another possibility would be to allow rental units to receive Energy Star designation. This could be determined by companies who e.g. do home weatherization.

“Cash for Caulkers” This discussion is relevant to pending legislation that would weatherize millions of homes in the U.S. as part of the Recovery Act. Landlord-tenant problems are perhaps even more severe with building efficiency because insulation and ductwork is more difficult to verify than appliances. The current plan would provide $3000-$4000 per home, with homeowners typically paying at least 50% of program costs.

Concluding Remarks Results provide some empirical support for conventional wisdom about landlord-tenant problem. This market failure is difficult to address with policy. Standards address problem, but are an imperfect tool. A complementary approach (also imperfect) would be to provide Energy Star labels for rental units themselves. This could work well with pending weatherization legislation.