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Double moral hazard and the energy efficiency gap

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  • Louis-Gaëtan Giraudet

    (CIRED - centre international de recherche sur l'environnement et le développement - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - AgroParisTech - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement)

  • Sébastien Houde

    (University of Maryland [College Park] - University of Maryland System)

Abstract

We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We argue that such problems are likely to be important for home energy retrofits, where both the seller and the buyer can take hidden actions. The retrofit contractor may cut on the quality of installation to save costs, while the homeowner may rebound, that is, increase her use of energy services when provided with higher energy efficiency. We first formalize the double moral hazard problem described above and examine how the resulting energy efficiency gap can be reduced through minimum quality standards or energy-savings insurance. We then calibrate the model to the U.S. home insulation market and quantify the deadweight loss. We find that for a large range of market environments, the welfare gains from undoing moral hazard are substantially larger than the costs of quality audits. They are also about one order of magnitude larger than those from internalizing carbon dioxide externalities associated with the use of natural gas for space heating. Moral hazard problems are consistent with homeowners investing with implied discount rates in the 15-35% range. Finally, we find that minimum quality standards outperform energy-savings insurance.

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  • Louis-Gaëtan Giraudet & Sébastien Houde, 2014. "Double moral hazard and the energy efficiency gap," CIRED Working Papers hal-01016109, HAL.
  • Handle: RePEc:hal:ciredw:hal-01016109
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01016109
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    Cited by:

    1. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins & Robert C. Stowe, 2015. "An Assessment of the Energy-Efficiency Gap and Its Implications for Climate Change Policy," Working Papers 2015.28, Fondazione Eni Enrico Mattei.
    2. Marie-Laure Nauleau & Louis-Gaëtan Giraudet & Philippe Quirion, 2015. "Energy Efficiency Policy with Price-quality Discrimination," Working Papers 2015.33, Fondazione Eni Enrico Mattei.
    3. Koirala, Bishwa S. & Bohara, Alok K. & Berrens, Robert P., 2014. "Estimating the net implicit price of energy efficient building codes on U.S. households," Energy Policy, Elsevier, vol. 73(C), pages 667-675.
    4. Dissemin, uploaded via & Nauleau, Marie-Laure & Giraudet, Louis-Gaëtan & Quirion, Philippe, 2018. "Energy efficiency subsidies with price-quality discrimination," OSF Preprints 5emgn, Center for Open Science.
    5. Louis-Gaetan Giraudet and Dominique Finon, 2015. "European experiences with white certifirecate obligations: A critical review of existing evaluations," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    6. Nauleau, Marie-Laure & Giraudet, Louis-Gaëtan & Quirion, Philippe, 2015. "Energy efficiency subsidies with price-quality discrimination," Energy Economics, Elsevier, vol. 52(S1), pages 53-62.

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    Keywords

    Energy efficiency gap; moral hazard; energy-savings insurance; minimum quality standard;
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