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Optimal Consumption and Investment with Energy-Efficiency Adoption

Author

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  • Anthony Britto
  • Carlos Oliveira
  • Max Kleinebrahm

Abstract

Despite many decades of research, economically grounded models that analyse energy consumption and energy-efficiency adoption within a unified framework remain underdeveloped. This article addresses this gap by proposing a model of consumption, investment, and energy-efficiency adoption under uncertainty. It develops new definitions of the rebound and backfire effects, and integrates their welfare implications into a model of optimal subsidy design. Macro-level technology diffusion and energy consumption across heterogeneous agents are also formalised. Explicit results for core objects are derived, including the adoption threshold and post-adoption strategies, and these are shown to depend on agent wealth, introducing a novel channel through which financial conditions influence technology-adoption decisions. An approximation scheme is proposed to estimate welfare implications explicitly. Adoption of energy efficiency is shown to be welfare improving in the main. A detailed case study of a representative German single-family home illustrates the theoretical results. Numerical analysis indicates that the subsidy policy effectively steers aggregate energy consumption.

Suggested Citation

  • Anthony Britto & Carlos Oliveira & Max Kleinebrahm, 2026. "Optimal Consumption and Investment with Energy-Efficiency Adoption," Papers 2604.28052, arXiv.org.
    • Handle: RePEc:arx:papers:2604.28052
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    File URL: http://arxiv.org/pdf/2604.28052
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