Energy-Efficiency Investments and Public Policy

Concern about carbon dioxide as a greenhouse gas has focused renewed attention on energy conservation because fossil fuel combustion is a major source of CO2 emissions. Since it is generally acknowledged that energy use could be significantly reduced through broader adoption of existing technologies, policy makers need to know how effective various policy instruments might be in accelerating the diffusion of these technologies. We examine the factors that determine the rate of diffusion, focusing on (i) potential market failures: information problems, principal-agent slippage, and unobserved costs, and (ii) explanations that do not represent market failures: private information costs, high discount rates, and heterogeneity among potential adopters. Through a series of simulations we explore how alternative policy instruments--both economic incentives and more conventional, direct regulations-could hasten the diffusion of energy-conserving technologies.