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Energy Tax Credits and Residential Conservation Investment

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  • Kevin A. Hassett
  • Gilbert E. Metcalf

Abstract

We model the decision to invest in residential energy conservation capital as an irreversible investment in the face of price uncertainty. The irreversible nature of this investment means that there is a value to waiting to invest (an option value) which helps explain the low rate of conservation investment as a result of the residential energy tax credit. Simulations suggest that a tax credit of the type implemented from 1978 through 1985 will not increase conservation investment significantly. We investigate the empirical evidence on the effectiveness of credits using data from a panel data set of roughly 38,000 individual tax returns followed over a three year period from 1979-1981. Unlike previous work, we find that the energy tax credit is statistically significant in explaining the probability of investing. Our estimates suggest that increasing the federal credit by 10 percentage points would increase the percentage of households claiming the credit from 5.7% to 7.1%.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4020.

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Date of creation: Mar 1992
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Publication status: published as Journal of Public Economics, vol. 57, pp. 201-217, (July 1995).
Handle: RePEc:nbr:nberwo:4020

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  1. Jovanovic, Boyan & Lach, Saul, 1988. "Entry, Exit, And Diffusion With Learning By Doing," Working Papers, C.V. Starr Center for Applied Economics, New York University 88-16, C.V. Starr Center for Applied Economics, New York University.
  2. Train, Kenneth, 1985. "Discount rates in consumers' energy-related decisions: A review of the literature," Energy, Elsevier, Elsevier, vol. 10(12), pages 1243-1253.
  3. Walsh, Michael J., 1989. "Energy tax credits and housing improvement," Energy Economics, Elsevier, Elsevier, vol. 11(4), pages 275-284, October.
  4. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
  5. Ronald J. Sutherland, 1991. "Market Barriers to Energy-Efficiency Investments," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 15-34.
  6. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy paradox and the diffusion of conservation technology," Resource and Energy Economics, Elsevier, Elsevier, vol. 16(2), pages 91-122, May.
  7. Cameron, Trudy Ann, 1985. "A Nested Logit Model of Energy Conservation Activity by Owners of Existing Single Family Dwellings," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 205-11, May.
  8. Dubin, Jeffrey A. & Henson, Steven E., 1988. "The distributional effects of the Federal Energy Tax Act," Resources and Energy, Elsevier, Elsevier, vol. 10(3), pages 191-212, September.
  9. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 707-27, November.
  10. Edwin H. Carpenter & S. Theodore Chester, Jr., 1984. "Are Federal Energy Tax Credits Effective? A Western United States Survey," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2), pages 139-149.
  11. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 225-38, January.
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