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Uncertainty, loss aversion, and markets for energy efficiency

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  • Greene, David L.
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    Abstract

    Increasing energy efficiency is critical to mitigating greenhouse gas emissions from fossil-fuel combustion, reducing oil dependence, and achieving a sustainable global energy system. The tendency of markets to neglect apparently cost-effective energy efficiency options has been called the "efficiency gap" or "energy paradox." The market for energy efficiency in new, energy-using durable goods, however, appears to have a bias that leads to undervaluation of future energy savings relative to their expected value. This paper argues that the bias is chiefly produced by the combination of substantial uncertainty about the net value of future fuel savings and the loss aversion of typical consumers. This framework relies on the theory of context-dependent preferences. The uncertainty-loss aversion bias against energy efficiency is quantifiable, making it potentially correctible by policy measures. The welfare economics of such policies remains unresolved. Data on the costs of increased fuel economy of new passenger cars, taken from a National Research Council study, illustrate how an apparently cost-effective increase in energy efficiency would be uninteresting to loss-averse consumers.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 4 (July)
    Pages: 608-616

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    Handle: RePEc:eee:eneeco:v:33:y:2011:i:4:p:608-616

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    Web page: http://www.elsevier.com/locate/eneco

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    Keywords: Energy efficiency Fuel economy Loss aversion;

    References

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    Citations

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    Cited by:
    1. Linn, Joshua, 2014. "Explaining the Adoption of Diesel Fuel Passenger Cars in Europe," Discussion Papers dp-14-08, Resources For the Future.
    2. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.
    3. Ardjan Gazheli & Miklós Antal & Ben Drake & Tim Jackson & Sigrid Stagl & Jeroen van den Bergh & Manuel Wäckerle, 2013. "Policy responses by different agents/stakeholders in a transition: Integrating the Multi-level Perspective and behavioral economics," WWWforEurope Working Papers series 48, WWWforEurope.
    4. Turner, Karen, 2012. "'Rebound' effects from increased energy efficiency: a time to pause and reflect," Stirling Economics Discussion Papers 2012-15, University of Stirling, Division of Economics.
    5. Anna Alberini & Silvia Banfi & Celine Ramseier, 2011. "Energy Efficiency Investments in the Home: Swiss Homeowners and Expectations about Future Energy Prices," CEPE Working paper series 11-80, CEPE Center for Energy Policy and Economics, ETH Zurich.
    6. Greene, David L. & Evans, David H. & Hiestand, John, 2013. "Survey evidence on the willingness of U.S. consumers to pay for automotive fuel economy," Energy Policy, Elsevier, vol. 61(C), pages 1539-1550.
    7. Laurence Turcksin & Olivier Mairesse & Cathy Macharis & Joeri Van Mierlo, 2013. "Encouraging Environmentally Friendlier Cars via Fiscal Measures: General Methodology and Application to Belgium," Energies, MDPI, Open Access Journal, vol. 6(1), pages 471-491, January.
    8. Adriaan Perrels & Tarja Tuovinen, 2012. "The Effectiveness of Differentiation of the Finnish Car Purchase Tax according to Carbon Dioxide Emission Performance," Research Reports 168, Government Institute for Economic Research Finland (VATT).
    9. Panzone, Luca A., 2013. "Saving money vs investing money: Do energy ratings influence consumer demand for energy efficient goods?," Energy Economics, Elsevier, vol. 38(C), pages 51-63.

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