Renting Inefficiency

(This blog post co-authored by David I. Levine)

When people own a home or condominium, they have incentives to think about the efficiency of their appliances.  Thus, more than a third of homeowners’ major appliances such as fridges, dishwashers and clothes washers have the EPA Energy Star rating for efficiency (see Figure 1).

The story is considerably different for renters. In most rental units tenants pay their own electricity bills, so landlords don’t have much incentive to invest in energy-efficient appliances.  Landlords would only benefit from buying more costly energy-efficient appliances if enough tenants were willing to pay slightly higher rents in exchange for the lower utility bills.  Unfortunately,  tenants typically have no way to learn the energy efficiency of each appliance in each potential apartment and translate that efficiency into projected utility bills. Thus, tenants are rarely willing to pay higher rent for more energy-efficient apartments.

As a consequence, rental units tend not to be very energy-efficient. In fact, rental units have fewer than half as many Energy Star appliances as homeowners. And a recent EI@Haas working paper shows that these differences remain after controlling for household income, demographics, energy prices, and weather (click here).

This rate is too low. The efficient level of Energy Star appliances in apartments is probably at least as high as the levels currently observed among homeowners, and perhaps even higher. For example, one of us (Davis, 2008) found that energy-efficient clothes washers are a good investment for 83% of U.S. households which is double the rate even of today’s homeowners.

To help potential tenants make decisions that benefit themselves, landlords and the environment, they need clear and credible information.  Energy Guide labels have helped improve information on future energy savings from efficient appliances (see Figure 2).  We need similar “report cards” on the energy use of apartment units. Like an Energy Guide label for apartments, this report card could provide a forecast of annual operating cost based on the characteristics of an apartment’s appliances and its heating and cooling equipment.

With that standardized report card, consumers could better incorporate energy-efficiency considerations when comparing apartments. Just like the Energy Guide labels, it would make sense to include information about how each apartment unit compares to similar units. A typical report card might read:

“This apartment unit has expected gas and electricity costs of $123 per month, assuming average usage. That utility bill is higher than 67 percent of apartments this size, meaning most apartments this size have lower expected energy costs.”

The Energy Guide labels for appliances are administered by the Federal Trade Commission. However, there is no need to wait for the FTC to impose federal requirements for energy-efficiency labels for apartments. Any state or city can start a rating system based on these principles.