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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%.

Suggested Citation

  • Kevin A. Hassett & Gilbert E. Metcalf, 1992. "Energy Tax Credits and Residential Conservation Investment," NBER Working Papers 4020, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4020
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    References listed on IDEAS

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    Cited by:

    1. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2005. "A tale of two market failures: Technology and environmental policy," Ecological Economics, Elsevier, vol. 54(2-3), pages 164-174, August.
    2. Popp, David & Newell, Richard G. & Jaffe, Adam B., 2010. "Energy, the Environment, and Technological Change," Handbook of the Economics of Innovation, Elsevier.
    3. repec:eee:eneeco:v:70:y:2018:i:c:p:421-428 is not listed on IDEAS
    4. Viju, Crina & Kerr, William A. & Nolan, James F., 2006. "Subsidization of the Biofuel Industry: Security vs. Clean Air?," 2006 Annual meeting, July 23-26, Long Beach, CA 21321, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Bruno CRUZ & Aude POMMERET, 2003. "Subsidizing energy saving capital accumulation: a real option approach," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.14, Université de Lausanne, Faculté des HEC, DEEP.
    6. Adam B. Jaffe & Richard G. Newell & Robert N. Stavins, 2000. "Technological Change and the Environment," NBER Working Papers 7970, National Bureau of Economic Research, Inc.
    7. Gilbert E. Metcalf, 2009. "Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 63-83, Winter.
    8. Carsten Lynge Jensen & Lars Gårn Hansen & Troels Fjordbak & Erik Gudbjerg, 2011. "The effect of providing free autopoweroff plugs to households on electricity consumption - A field experiment," IFRO Working Paper 2011/10, University of Copenhagen, Department of Food and Resource Economics.
    9. Stavins, Robert & Jaffe, Judson & Schatski, Todd, 2007. "Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy," Working Paper Series rwp07-016, Harvard University, John F. Kennedy School of Government.
    10. Wang, Honglin & Yu, Fan & Reardon, Thomas & Huang, Jikun & Rozelle, Scott, 2013. "Social learning and parameter uncertainty in irreversible investments: Evidence from greenhouse adoption in northern China," China Economic Review, Elsevier, vol. 27(C), pages 104-120.
    11. Théophile T. Azomahou & Raouf Boucekkine & Phu Nguyen-Vanc, "undated". "Promoting Clean Technologies: The Energy Market Structure Crucially Matters," Working Papers 2008_13, Business School - Economics, University of Glasgow.
    12. Gilbert Metcalf & David Weisbach, 2008. "The Design of a Carbon Tax," Discussion Papers Series, Department of Economics, Tufts University 0727, Department of Economics, Tufts University.
    13. DAUBANES Julien, 2009. "Changement climatique, instruments économiques et propositions pour un accord post-Kyoto : une synthèse," LERNA Working Papers 09.19.295, LERNA, University of Toulouse.
    14. Hammar, Henrik & Löfgren, Åsa, 2007. "Explaining adoption of end of pipe solutions and clean technologies," Working Papers 102, National Institute of Economic Research.
    15. AZOMAHOU, Théophile & BOUCEKKINE, Raouf & NGUYEN-VAN, Phu, 2009. "Promoting clean technologies under imperfect competition," CORE Discussion Papers 2009011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    16. Hellman Miller, Kelly & Colantuoni, Francesca & Lasco Crago, Christine, 2014. "An Empirical Analysis of Residential Energy Efficiency Adoption by Housing Types and Occupancy," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170533, Agricultural and Applied Economics Association.
    17. Löfgren, Åsa & Millock, Katrin & Nauges, Céline, 2007. "Using Ex Post Data to Estimate the Hurdle Rate of Abatement Investments - An Application to the Swedish Pulp and Paper Industry and Energy Sector," Working Papers in Economics 249, University of Gothenburg, Department of Economics.
    18. Patrik Söderholm & Ger Klaassen, 2007. "Wind Power in Europe: A Simultaneous Innovation–Diffusion Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 36(2), pages 163-190, February.
    19. Stavins, Robert N. & Jaffe, Judson & Schatzki, Todd, 2007. "Too Good to Be True? Three Economic Assessments of California Climate Change Policy," Discussion Papers dp-07-12, Resources For the Future.
    20. Baddeley, M., 2011. "Energy, the Environment and Behaviour Change: A survey of insights from behavioural economics," Cambridge Working Papers in Economics 1162, Faculty of Economics, University of Cambridge.
    21. Marisa Beck, Randall Wigle, 2014. "Carbon Revenue: Recycling versus Technological Incentives," LCERPA Working Papers 0079, Laurier Centre for Economic Research and Policy Analysis, revised 13 Jan 2014.
    22. Gilbert E. Metcalf, 2007. "Federal Tax Policy towards Energy," NBER Chapters,in: Tax Policy and the Economy, Volume 21, pages 145-184 National Bureau of Economic Research, Inc.
    23. Isamu Matsukawa, 2005. "The Benefits of Information on the Efficient Usage of Consumer Durables," Others 0501005, University Library of Munich, Germany.
    24. Stavins, Robert, 2000. "Economic Analysis of Global Climate Change Policy: A Primer," Working Paper Series rwp00-003, Harvard University, John F. Kennedy School of Government.

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