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Cost-Benefit Analysis of Home Energy Conservation Investments and Greenhouse Gas Reduction

Hunt Allcott and Michael Greenstone

Classical economics says people won’t pass up free money. If there’s a dollar lying on the seat of a subway car, somebody will take it, and quickly. Yet with respect to energy efficiency, the behavior of utility customers seems to contradict that accepted belief.

Utilities throughout the United States offer a wide range of incentives for people to make their homes more energy efficient, and thus reduce their energy bills. These include an expensive energy audit (usually subsidized or free for a customer) where a technician checks a home and identifies opportunities for increasing energy efficiency. These could include measures like adding insulation, air sealing, upgrading heating equipment, weather stripping windows and doors, and installing programmable thermostats. Often the programs also provide free installation of a set of energy efficiency measures during the audit (e.g., energy efficient light bulbs) and offer very generous rebates for the installation of more expensive measures. However, far fewer than expected decide to have the audits, and even fewer take up the measures recommended in those audits.   

A team of E2e researchers—Hunt Allcott of New York University and Michael Greenstone of the University of Chicago—ran a 100,000 household randomized control trial to better understand the returns to investing in energy efficiency. Their experiment evaluates two federally-funded residential energy efficiency programs in Wisconsin. They test for behavioral or informational biases that could influence participation through a set of promotional letters sent to households. Contrary to conventional beliefs about efficiency, Allcott and Greenstone find that the costs of participation exceed the value of the energy savings and environmental benefits. Energy savings predictions turn out to overstate actual savings by 58 percent. 

Their findings suggest several areas for improvement in the design of energy efficiency subsidies. Their results suggest reducing or removing subsidies for energy audits, and subsidies for energy-efficiency investments should be better targeted towards investments that will deliver the greatest cuts in pollution and greenhouse gas emissions. Improving residential energy-efficiency programs in these ways could lead to gains of about $2.50 for every subsidy dollar spent.   

The working paper can be found here.