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Reconciling WTP to actual adoption of green energy tariffs: A diffusion model of an induced environmental marke

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  • Ivan Diaz-Rainey
  • Dionisia Tzavara

Abstract

This paper develops a formal model that links the willingness to pay (WTP) literature with the established innovation diffusion literature. This concern arises from an attempt to reconcile the large disparities that have been observed between actual adoption of green energy tariffs and WTP for such tariffs. These disparities have often been attributed to upward response bias and the free rider problem. However, empirical research indicates that other factors have hindered the development of green energy markets, including supply side problems and poor regulation. Using an epidemic diffusion framework our model shows how increasing consumer environmental concern driven by word of mouth and mass media communication channels results in a growing number of people who state they are WTP for green energy. The presence of upward response bias and the free rider problem result in 'feasible adoption' being below stated WTP. Feasible adoption is, in turn, differentiated from actual adoption by the extent of market imperfections. It is concluded that; (1) the potential of such markets may take time to reap and that the low penetration rates of today may reflect a conventional diffusion trajectory and (2); low and stable energy prices appear to be a precondition if consumers are to contribute substantively to the funding of renewables investments through green tariffs.

Suggested Citation

  • Ivan Diaz-Rainey & Dionisia Tzavara, 2009. "Reconciling WTP to actual adoption of green energy tariffs: A diffusion model of an induced environmental marke," RSCAS Working Papers 2009/33, European University Institute.
  • Handle: RePEc:rsc:rsceui:2009/33
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    References listed on IDEAS

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    1. Banfi, Silvia & Farsi, Mehdi & Filippini, Massimo & Jakob, Martin, 2008. "Willingness to pay for energy-saving measures in residential buildings," Energy Economics, Elsevier, vol. 30(2), pages 503-516, March.
    2. Wiser, Ryan H., 2007. "Using contingent valuation to explore willingness to pay for renewable energy: A comparison of collective and voluntary payment vehicles," Ecological Economics, Elsevier, vol. 62(3-4), pages 419-432, May.
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    Keywords

    Willingness-to-pay; innovation diffusion; green energy; environmental valuation;

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