Behavioral Economics and the Energy Efficiency Paradox

Apr 13, 2012 in Blog

Spend enough time working on energy efficiency in the U.S. and you will eventually arrive at a curious fact. Despite the best efforts of government to encourage conservation, Americans leave an estimated $130 billion on the table every year in energy-saving opportunities. That’s more than the operating budget of every federal department except for defense.

Energy is a big industry—more than $1.16 trillion annually. That much money means pursuing energy efficiency is a low-cost strategy for real savings. Foundational economic work on home appliances attributes the efficiency gap to customer myopia and naiveté. Customers shopping in a home improvement store simply do not place the same value on energy efficient products that policy-makers or investors looking to subsidize or fund them do. This insight is just a start in understanding what is behind this behavior and how it might be changed.

Behavioral economics suggests another set of reasons beyond costs and benefits. First, energy efficiency is rarely an idea or intention at the “top of the mind.” Instead, other important matters about work, family, and education swamp it. Second, the decisions themselves are complex, with many options and difficult mathematical calculations. So people tend to procrastinate. For a long time.

Our own work shows that behavioral barriers are extremely important, and small details of the environment can affect decisions. At ideas42, we think these lessons are useful to different parties interested in helping others use energy smarter. It can help communicators looking to market energy efficiency programs better, policy-makers structuring regulatory policy, and businesses trying to forecast policy effects better.

For instance, take gas prices and car sales. Standard economics says higher gas prices means fewer gas guzzlers will be sold. How many fewer? The answer depends on how consumers notice and absorb information about prices for gas and new cars. If inattention leads consumers to undervalue or overvalue gasoline costs when car shopping, the collective benefits of policy options like labeling and mileage standards can be made clearer.

This is the sort of real world question we are tackling by asking what energy efficiency can learn from economics and vice-versa. We start by isolating and understanding what we call behavioral failures, where individuals fail to make the best choice for themselves. We then devise creative solutions to mend it