Essays on the economics of energy efficiency policies

• Main Author: Brue Perez, Albert
• Published: London School of Economics and Political Science (University of London) 2017
• Subjects: HB Economic Theory
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.740100

This work presented in this thesis aims to provide a better understanding of how agents respond to policy incentives to encourage energy efficiency improvements. First of all, the way agents respond to policy incentives crucially depends on heterogeneity in characteristics determining their responsiveness to taxes and subsidies. Second, agents’ heterogeneous responses to policy can undermine the cost-effectiveness of subsidies. Third, under conditions where the policy targeting is poor or agents are not very responsive to the traditional market-based instruments other policy instruments based on information provision or nudges may be more effective. I propose a theoretical model on optimal tax and subsidy combinations to correct externalities from energy consumption and underinvestment in energy efficient technologies. I show that when agents misperceive their true energy efficiency, the targeting efficiency of policies based on subsidies is poor and consumers selection into adoption is adverse. Adverse selection arises because those more likely to adopt consume less energy and overvalue the benefit from adoption. In the second chapter, I present a discussion on energy policies in the United Kingdom and analyse the energy consumption and energy efficiency measures adoption patterns using data for households in England and Wales. This sets the stage for Chapter 3, where I present an empirical study to test whether selection into adoption is adverse or not. I find that early technology adopters consume more energy before adoption and experience higher energy consumption drops upon adoption. Thus, supporting the idea that consumers’ heterogeneity plays a major role to explain the observed adoption patterns. The results suggest that adoption decisions are driven by heterogeneity in preferences rather than heterogeneity in beliefs. Hence, overall selection is not adverse and this suggests the role of misperceptions is dominated by the effect of preferences heterogeneity. This does not preclude, however, that biased beliefs may have a role at determining the adoption patterns and responses to policy interventions.