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Optimal investment in energy efficiency as a problem of growth rate maximisation

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Listed:
  • Britto, Anthony
  • Dehler-Holland, Joris
  • Fichtner, Wolf

Abstract

Despite the vast literature on the energy-efficiency gap, there is a general dearth of investment models which incorporate the consumer's temporal freedom in the investment decision. Focusing on the building sector, we formulate optimal investment in energy efficiency as a problem of wealth growth-rate maximisation under uncertainty, subject to the diminishing marginal utility of retrofitting. The resulting model provides an unambiguous answer to the question of how much, and at what point in time, consumers with given wealth dynamics and parameters should invest in energy-efficiency measures for their particular dwelling. We treat in detail two foundational wealth dynamics: consumers who solely earn a fixed income, and those whose wealth grows multiplicatively. The differences in decision-making between these cases is seen to be substantial, with the latter group exhibiting further significant heterogeneity. All of this has profound implications for the social planner: on the one hand, we show how he must work harder to influence wealthier consumers; on the other, the model provides a methodology for crafting highly targeted policy interventions.

Suggested Citation

  • Britto, Anthony & Dehler-Holland, Joris & Fichtner, Wolf, 2021. "Optimal investment in energy efficiency as a problem of growth rate maximisation," Working Paper Series in Production and Energy 56, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    • Handle: RePEc:zbw:kitiip:56
    DOI: 10.5445/IR/1000130464
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    References listed on IDEAS

    as
    1. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy-efficiency gap What does it mean?," Energy Policy, Elsevier, vol. 22(10), pages 804-810, October.
    2. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
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    Cited by:

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    2. Alexander Adamou & Yonatan Berman & Diomides Mavroyiannis & Ole Peters, 2021. "Microfoundations of Discounting," Decision Analysis, INFORMS, vol. 18(4), pages 257-272, December.

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    More about this item

    Keywords

    the energy-efficiency gap; energetic building retrofits; diminishing marginal utility; investment under uncertainty; growth-rate maximisation; social planning; retrofit incentives;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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