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Discount Rates And Energy Efficiency

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  • Richard B. Howarth
  • Alan H. Sanstad

Abstract

Empirical studies provide compelling evidence that economic agents do not adopt the complete range of energy-efficient technologies that are cost-effective under prevailing prices and market conditions. Analysts commonly attribute this anomaly to the use of high discount rates in energy-related decisions-an interpretation that is difficult to reconcile with standard models of rational choice. This paper recasts the controversy from the perspective of economic theory and finds that market failures related to asymmetric information, bounded rationality, and transaction costs are major contributors to the so-called "efficiency gap." Copyright 1995 Western Economic Association International.

Suggested Citation

  • Richard B. Howarth & Alan H. Sanstad, 1995. "Discount Rates And Energy Efficiency," Contemporary Economic Policy, Western Economic Association International, vol. 13(3), pages 101-109, July.
  • Handle: RePEc:bla:coecpo:v:13:y:1995:i:3:p:101-109
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    References listed on IDEAS

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    1. Howarth, Richard B. & Winslow, Margrethe A., 1994. "Energy use and CO2 emissions reduction: Integrating pricing and regulatory policies," Energy, Elsevier, vol. 19(8), pages 855-867.
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    4. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, 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, vol. 0(Number 3), pages 15-34.
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    7. Sanstad, Alan H & Blumstein, Carl & Stoft, Steven E, 1995. "How high are option values in energy-efficiency investments?," Energy Policy, Elsevier, vol. 23(9), pages 739-743, September.
    8. Henry Ruderman & Mark D. Levine & James E. McMahon, 1987. "The Behavior of the Market for Energy Efficiency in Residential Appliances Including Heating and Cooling Equipment," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 101-124.
    9. Steven Stoft, 1993. "Appliance Standards and the Welfare of Poor Families," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 123-128.
    10. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    11. Robinson, John B., 1991. "The proof of the pudding : Making energy efficiency work," Energy Policy, Elsevier, vol. 19(7), pages 631-645, September.
    12. Koomey, Jonathan G. & Sanstad, Alan H., 1994. "Technical evidence for assessing the performance of markets affecting energy efficiency," Energy Policy, Elsevier, vol. 22(10), pages 826-832, October.
    13. DeCanio, Stephen J., 1993. "Barriers within firms to energy-efficient investments," Energy Policy, Elsevier, vol. 21(9), pages 906-914, September.
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