Michael Greenstone presented at Bocconi University a new paper, coauthored with Hunt Allcott, where they analyse the welfare impacts of residential energy efficiency programs in Wisconsin through a randomized control trial. The Wisconsin programs consisted in a two-step process, whereby homeowners decide first to have a home energy audit, and second they eventually chose to undertake one or more recommended investments. The programs subsidized both audits and investments.
The paper delivers several important empirical results. First, the randomized experiment indicates that there are no informational or behavioral failures, in that informational and behavioral factors do not represent barriers to takeup, at least in the case of the Wisconsin programs. Only price in the form of subsidies, mattered. Second, there is evidence of strong self-selection. The marginal investment probabilities decrease sharply as the subsidy increases. While the subsidy induces additional households to audit, these marginal households are less and less interested in making subsequent investments. The self-selection has strong implications for the third result, namely that the programs have a negative social welfare change. The monetary value of the externality benefit from reduced energy does not compensate for the reduction in consumer utility.
The authors conclude that subsidizing energy conservation remains an important means to improve energy efficiency. For example, they find that the market for home energy audits and retrofits would almost entirely disappear in the absence of government intervention. However, they highlight that socially desirable energy efficiency programs should be designed to better target the market failures and incorporate better knowledge of the parameters governing consumer behavior.