Energy efficiency is a tough sell- Even when it is “free”!
Almost two weeks into the New Year, how are those resolutions going? Every year, my long list of resolutions includes several tasks I should be doing but have trouble finding time for, like going to the dentist and installing roof insulation (we have none).
It’s January 12 and I’ve already lost motivation to chase any of these to-dos off my list. I find it all too easy to ignore these low-dopamine tasks when something more pressing (or more fun) attracts my attention.
But wait! This guy makes installing attic insulation look like fun for the whole family!
Source: http://go.hfcu.org/blog/topic/mass-save-financing
Take the insulation example. Everyone says that home energy efficiency improvements are good for us. An insulation upgrade reduces energy costs, reduce emissions (if emissions are not subject to a binding cap), and can make winters cozier. But ask me if I want to spend my Saturday researching the recommended R-value for insulation in my climate zone, and I will come up with a long list of things that are more exhilarating.
Given limited time, motivation, and cognitive capacity, we all have to choose what we pay attention to and what information we act on. In a new E2e Project working paper, my co-authors and I document just how hard it can be to get people to pursue privately beneficial energy efficiency improvements.
Rational inattention?
Economists are increasingly interested in the idea that people possess a finite capacity to process – let alone act on- the information they receive. In the world of energy efficiency, this has some interesting implications.
Jim Sallee notes in a recent paper that “rational inattention” could help explain the apparent gap between the investments people make in efficiency improvements and the investments that are privately cost effective. The existence of this gap is largely predicated on cost-benefit analyses, including the famous McKinsey reports, that do not account for the “process costs” of implementing these improvements. If the additional time, hassle, and cognitive effort could be accounted for, the gap would surely look narrower.
This begs the question: how important are these hassle costs in determining the level of energy efficiency investment?
Energy efficiency is a tough sell… even when it is “free”
Co-authors (Michael Greenstone and Catherine Wolfram) and I are working on a study that examines, among other things, the role of information and process costs in households’ decision to pursue efficiency improvements.
We analyze participation in the Federal Weatherization Assistance Program (WAP), which aims to reduce the energy burden of low-income Americans by installing energy efficiency measures in their homes. Homeowners stand to benefit significantly from reduced energy bills. Importantly, all hardware and installation costs (averaging around $5000 per household in our study) are paid for by the Federal government.
Although households incur no direct monetary costs to participate, the process of applying for weatherization is onerous and time intensive. We ran a large field experiment in which we significantly reduced information and process costs for a random subset of presumptively eligible households.
Households assigned to our “encouraged” group were inundated with information about the program. In addition, households were offered extensive personal assistance with completing their application.
To get the word out about both the program and our enrollment assistance, our field staff knocked on 7,000 doors, launched 23,500 targeted “robo-calls”, and mailed thousands of post cards. Once a household signaled interest, our staff would schedule a meeting to assist with the application materials. Over the course of more than 2,700 personal meetings and 9,000 phone calls, our staff worked with households to navigate the application process.
The graph below shows the impact of our efforts to reduce information and process-related barriers to weatherization.
This graph makes two important points.
First, it documents surprisingly low take-up of this substantive (and “free”) energy efficiency retrofit, even among households that have been informed- via multiple channels- about the sizable benefits. The figure shows that the application rate in our encouraged group is less than 15 percent (up from 2 percent among households that did not receive our encouragement and assistance).
Second, the graph shows an underwhelming response to our overwhelming encouragement efforts. The rate at which households took up the efficiency improvement increased by only 5 percentage points as a result of our encouragement. In other words, a lot of effort to encourage a relatively small number of efficiency retrofits.
It is important to keep in mind that our intervention eliminated some – but by no means all – of the time and effort required to participate in the program. Households in the treatment group had to actively decide to participate, engage with our staff, meet with contractors, endure the hassle of having a construction team working in their home, etc. One interpretation of these findings is that these remaining hassle and effort costs exceeded the expected benefits from weatherization for a majority of households.
Not worth the hassle?
Our study suggests that non-monetary costs incurred to implement an efficiency retrofit are significant and can be prohibitive. Of course, we should be very cautious about drawing general conclusions from this specific context. For one thing, the importance of process costs is likely to vary across efficiency improvements (surely changing a light bulb requires fewer cognitive resources!).
When it comes to more involved efficiency retrofits, however, these two qualitative findings generalize to my own experience. In my house, the hassle/time/attention costs of making these kinds of home energy efficiency improvements have been prohibitive. And frankly, it will take a serious nudge to draw my attention away from my other going concerns (parenting, economics, Season 5 of Downton Abbey) up to the bare rafters of my roof.
On this blog, the need for accurate, field-based estimates of returns on energy efficiency investments has been emphasized. But there is also real value in accounting for hard-to-account, non-monetary costs. Taken together, accurate and comprehensive measures of benefits and costs can help policy makers identify the biggest negawatt for their nudge.
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@Professor Fowlie
Do you think your study has any implications on the cost effectiveness of providing consumers with energy efficiency subsidies? Specifically, given the low response rates even under your heavy encouragement, do you think energy efficiency programs may be under-estimating the “free-rider” rate? That people who are willing to spend the additional time and energy to go through the process of obtaining utility rebates were already more likely to take the incentivized action on their own?
Thanks,
Nate
It’s a very tough problem to crack, whether we’re talking about low income households that reap benefits without any out-of-pocket costs, or higher income households that may have to invest some money before seeing any benefit. Unfortunately, home buyers rarely look at the total cost of ownership, including energy costs. If they did, existing homeowners might be more motivated to make energy efficiency improvements because they would add to the home’s value.
It looks as if you’ve run up against one of the “three domains” identified by Michael Grubb in his fascinating book “Planetary Economics: Energy, climate change and the three domains of sustainable development” (ISBN: 9780415518826) – the difficulty of getting people to change behaviour (to which product and building standards can be a sensible response, alongside engagement). The others are the market-based area where economists are most happy and prices work, and driving the introduction of new technologies, where public-led investment is likely to be the solution…
A quick response to some great comments.
First, I should have mentioned that our study focused exclusively neighborhoods with high rates of home ownership (for the reasons you raise). Our screening appeared to work – the vast majority of residents we were able to speak with owned their home.
Second, when constructing the sample, we obtained records from the last ten years of weatherization assistance and excluded from the study sample any household that had already been weatherized under WAP (realizing this would make the household less likely – or ineligible- to participate in the program).
WRT cost effectiveness. From the perspective of the homeowner participating in the program, weatherization assistance should be cost effective absent process costs because the program covers all installation and equipment cost (and the homeowner enjoys lower energy costs and possibly a more comfortable home). In ongoing work we are addressing the larger question of whether returns on this investment exceed costs from a social perspective.
Thanks for reading!
Those are not good indications if you’ve already focused down on the most receptive corner of the market…
Following up on Azmat Malik’s comment, the “split incentive” problem is the KEY issue for low income consumers who are the targets of this program. Their home ownership rate has to be something well below 50%. It’s the landlords making almost 100% of the weatherization decisions.
The other problem highlighted by Andrew Benson’s comment is the reliance on “average” as being “representative.” The fact is that there is a very wide range of building parameters and consumer usage levels. For what percent of these consumers is weatherization truly cost-effective? That has to be the first question–we have to start with the consumer, not with the proposed measure. In California at least they start with the latter and proceed to try to fit square pegs into the many round holes instead of identifying the square holes first.
Did you consider differences in ‘ownership’, i.e. owner-occupied vs rental properties. I notice a significant difference in my behavior in the ‘care’ I give to my ‘owned’ car vs to a leased car. What if there were a scheme to monetize the savings; i.e. the resulting savings in emissions, and that were to be paid as cash to the person incurring the retrofit ‘hassle’.
A measly 15% of presumptively eligible households in the treatment group chose to apply? That is shocking low.
A complimentary hypothesis I’d like to propose is that at least some portion of the population is behaving perfectly rationally in forgoing the free weatherization because their house is already weatherized. It appears that social planners lack the means of differentiating between households with high and low space-conditioning-related energy use until people apply for the program. Do you have any statistics on the pre-existing weatherization rate of low-income Michigan households?