Energy Efficiency Economics and Policy

TLDR

Energy efficiency and conservation are key means for reducing greenhouse gas emissions, yet debates over market behavior and policy responses persist in the economic literature. The authors review economic concepts of consumer decision making in energy efficiency and assess how market and behavioral failures motivate policy intervention, examining evidence on effectiveness and cost. The review analyzes market barriers, failures, and behavioral failures in energy efficiency and evaluates policy effectiveness and cost. The evidence indicates potential welfare gains from energy efficiency policies, yet key market and behavioral failures remain uncertain.

Abstract

Energy efficiency and conservation are considered key means for reducing greenhouse gas emissions and achieving other energy policy goals, but associated market behavior and policy responses have engendered debates in the economic literature. We review economic concepts underlying consumer decision making in energy efficiency and conservation and examine related empirical literature. In particular, we provide an economic perspective on the range of market barriers, market failures, and behavioral failures that have been cited in the energy efficiency context. We assess the extent to which these conditions provide a motivation for policy intervention in energy-using product markets, including an examination of the evidence on policy effectiveness and cost. Although theory and empirical evidence suggests there is potential for welfare-enhancing energy efficiency policies, many open questions remain, particularly relating to the extent of some key market and behavioral failures.