Behavioral Economics and Energy Efficiency Regulation

Abstract

Energy efficiency — using less energy to provide an equivalent level of service — is part of the climate policy portfolio. Market failures might warrant encouraging energy efficiency, but an important justification comes from the realm of behavioral economics: that people erroneously underinvest in it. This creates difficulties for policy evaluation, which assumes that people’s choices, including energy efficiency investments, reflect actual preferences. The possibility of error leads to questioning whether consumers can be trusted to make “right” decisions in more complex areas and whether consumer mistakes should be perpetuated if correcting error would increase energy use. If error is convincingly present, the public could accept regulation as delegation of its choices to the government. A better remedy may be to provide consumers with sufficient information to correct alleged error; if they persist in such behavior, it should count in benefit-cost analysis.

Keywords: energy efficiency, behavioral economics, policy evaluation

JEL Classification: Q48, D03, D61