investing in energy conservation are homeowners passing up high yields abstract energy conservation is examined as an investment option for homeowners conservation technologies produce monetary benefits through reduced fuel costs calculations suggest that many conservation measures have rates of return significantly higher than alternative investments in stocks bonds and real estate yet the level of conservation activity is inconsistent with these high yields several barriers exist which inhibit investments in conservation it is perceived as risky and the cost of obtaining reliable information is high public policies to encourage conservation should focus on reducing the risk of purchasing energy saving devices by improving the accuracy of energy savings estimates

technology adoption under uncertainty take up and subsequent investment in zambia technology adoption often requires multiple stages of investment as new information emerges agents may abandon a technology that was profitable in expectation we use a field experiment to vary t

the energy efficiency paradox revisited through a partial observability approach the present paper examines the energy efficiency paradox demonstrated in greek manufacturing firms through a partial observability approach the data set used has resulted from a survey carried out among 161 energy saving technology firm adopters maximum likelihood estimates that arise from an incidental truncation model reveal that the adoption of the energy saving technologies is indeed strongly correlated to the returns of assets that are required in order to undertake the corresponding investments the source of the energy efficiency paradox lies within a wide range of factors policy schemes that aim to increase the adoption rate of energy saving technologies within the field of manufacturing are significantly affected by differences in the size of firms finally mixed policies seem to be more effective than policies that are only capital subsidy or regulation oriented

modeling energy technology choices which investment analysis tools are appropriate abstract a variety of tools from modern investment theory appear to hold promise for unraveling observed energy technology investment behavior that often appears anomalous when analyzed using traditional investment analysis methods this paper reviews the assumptions and important insights of the investment theories most commonly suggested as candidates for explaining the apparent energy technology investment paradox the applicability of each theory is considered in the light of important aspects of energy technology investment problems such as sunk costs uncertainty and imperfect information the theories addressed include the capital asset pricing model the arbitrage pricing theory and the theory of irreversible investment enhanced net present value methods are also considered the relevance of the capital asset pricing model and the arbitrage pricing theory given the special characteristics of energy technology investment decisions appears limited to the value of the theories conceptual insights in contrast the theory of irreversible investment and enhanced net present value are found to provide more useful modeling and analysis methods each capable of providing important insights into the energy technology investment paradox

research on the energy saving and revenue sharing strategy of escos under the uncertainty of the value of energy performance contracting projects abstract under the uncertainty of the value of energy performance contracting projects epcps this paper develops a revenue sharing bargaining model between an energy service company esco and an energy using organization eu based on the model the paper analyzes the impacts of energy prices risk adjusted discount rates and accidents on the esco s bargaining strategies the research shows that the greater the probability of adverse circumstances is the higher is the revenue share of the eu and the more disadvantageous is the esco s position in the game furthermore we design a forecast commitment contract between an esco and an eu and analyze the optimal product s energy savings commitment strategy of the esco to cope with uncertain energy savings and contract risk the research illustrates that by introducing penalties and commitments the contract can eliminate the impact of the uncertain energy savings on the contract execution to a certain extent when the eu takes a greater commitment risk the esco is willing to provide a higher commitment thus enhancing the strategy value of the bilateral relationship and reducing the contract risk finally the policy recommendations about improving shared savings contract standard third party energy savings measurement and verification mechanism and arbitration mechanism of epcs are provided

inducing investments and regulating externalities by command versus taxes a linear tax on an externality generating activity may not attain the first best social optimum the problem arises because a monopolist s gain from improving the characteristics of a product may differ from the social gain even when consumers are willing to pay for the change

two to tangle financial development political instability and economic growth in argentina abstract this paper studies the impact of financial liberalization on economic growth it contributes to this literature by using an innovative econometric methodology and a unique data set of historical series it presents power arch estimates for argentina for the period from 1896 to 2000 the main results show that the long run effect of financial liberalization on economic growth is positive while the short run effect is negative albeit substantially smaller interestingly we find that financial development affects growth only directly that is not through growth volatility

investment in energy efficiency do the characteristics of firms matter the literature on energy efficiency provides numerous examples of apparently profitable technologies that are not universally adopted yet according to the standard neoclassical theory of investment profit maximizing firms should undertake all investments with a positive net present value the standard theory also holds that the discount rate for computing the present value of a project should be the return available on other projects in the same risk class and therefore should not depend on characteristics of the firm this model as applied to energy saving investments is tested by examining whether firms characteristics influence their decision to join the environmental protection agency s voluntary green lights program a discrete choice regression is estimated over a large sample of participating and nonparticipating firms missing values in the data matrix are replaced with multiple imputations from a distribution estimated using the expectation maximization algorithm the results show that 1 sub

smart meter devices and the effect of feedback on residential electricity consumption evidence from a natural experiment in northern ireland abstract using a unique set of data and exploiting a large scale natural experiment we estimate the effect of real time usage information on residential electricity consumption in northern ireland starting in april 2002 the utility replaced prepayment meters with advanced meters that allow the consumer to track usage in real time we rely on this event account for the endogeneity of price and payment plan with consumption through a plan selection correction term and find that the provision of information is associated with a decline in electricity consumption of 11 17 we find that the reduction is robust to different specifications selection bias correction methods and subsamples of the original data the advanced metering program delivers reasonably cost effective reductions in carbon dioxide emissions even under the most conservative usage reduction scenarios

what do consumers believe about future gasoline prices a full understanding of how gasoline prices affect consumer behavior frequently requires information on how consumers forecast future gasoline prices we provide the first evidence on the nature of these forecasts by analyzing two decades of data on gasoline price expectations from the michigan survey of consumers we find that average consumer beliefs are typically indistinguishable from a no change forecast justifying an assumption commonly made in the literature on consumer valuation of energy efficiency we also provide evidence on circumstances in which consumer forecasts are likely to deviate from no change and on significant cross consumer forecast heterogeneity

civil wars and economic growth spatial dispersion this article quantifies the impact of civil wars on economic growth at home and in nearby countries three alternative measures of nearness contiguity length of contiguous borders and distance of closest approach are used to capture the spatial dispersion of civil war consequences we present short run panel estimates at five year intervals and long run 1961 95 panel estimates for the world generally the distance measures novel to this study and not contiguity provides the most accurate measure of the diffusion of the negative economic consequences of civil wars on other countries unlike earlier studies we also investigate the temporal influence of civil wars on growth at home and in nearby countries both the duration and the timing of civil wars have an economic impact

economics and rational conservation policy energy analysts have long been concerned with the apparently low level of energy efficient investments and have suggested the presence of various market barriers and failures that hinder investment the concept of a barrier as defined here is some force that is working against investment in energy efficient technologies market failures on the other hand are failures of the competitive paradigm that lead to economically inefficient outcomes market barriers require no particular response on the part of government while market failures may call for some policy response

survival versus consumption we develop an indirect method to estimate utility and willingness to pay wtp for reductions in the risk of death at various ages using a life cycle model of consumption we assume that an individual sets his consumption level each year so as to maximize his expected lifetime utility alternative assumptions about opportunities for borrowing and annuities characterize two polar types of societies in our robinson crusoe case an individual must be entirely self sufficient and annuities are not available in our perfect markets case an individual can borrow against future earnings and purchase actuarially fair annuities we show that under these assumptions wtp is the sum of livelihood discounted expected future earnings and consumer surplus to illustrate our methods we derive wtp for an average financially independent american man under plausible assumptions the model is calibrated to 1978 earnings e g 18 000 per year for men aged 45 54 with at least some income in the robinson crusoe case wtp increases from 500 000 at age 20 to a peak of 1 250 000 at age 40 and declines to 630 000 at age 60 in the perfect markets case age variations are less pronounced wtp is 1 050 000 at age 20 peaks at 1 070 000 at age 25 and declines to 600 000 at age 60 these results suggest that individuals value risks to their lives at several times the pro rata share of their future earnings

are energy efficiency standards justified abstract this paper develops an analytical framework for comparing the welfare effects of energy efficiency standards and pricing policies for reducing gasoline electricity and nationwide carbon emissions the model is parameterized with us data and includes key externalities in the energy transportation sectors and possible underinvestment in energy efficiency due to misperceptions over energy savings even with large misperceptions the extra welfare gains from complementing efficient pricing policies with energy efficiency standards are zero for reducing gasoline and 5 percent for reducing electricity and when viewed as substitutes these standards forgo 60 percent or more of the potential welfare gains from corresponding pricing policies a combination of energy efficiency and emissions standards is more than three times as costly as carbon pricing when there is no misperception over energy savings and even with large misperceptions combining carbon pricing with gasoline electricity taxes is better than combining it with energy efficiency standards

the energy efficiency gap what does it mean abstract as renewed attention has been given by policy makers to energy conservation issues it has frequently been asserted that an energy efficiency gap exists between actual and optimal energy use the critical questions is how to define the optimal level of energy efficiency this paper seeks to disentangle some confusing strands of argument that are frequently brought to bear on this question by identifying the major conceptual issues that determine the set of feasible answers we identify five separate and distinct notions of optimality the economists economic potential the technologists economic potential hypothetical potential the narrow social optimum and the true social optimum each of these has associated with it a corresponding definition of the energy efficiency gap our analysis demonstrates that necessary preconditions for identifying the right measure of the energy efficiency gap include understanding and disentangling market failure and non market failure explanations for the gradual diffusion of energy efficient technologies

who is afraid of political instability abstract an unstable macroeconomic environment is often regarded as detrimental to economic growth among the sources contributing to such instability much of the blame has been assigned to political issues this paper empirically tests for a causal and negative long run relation between political instability and economic growth but finds no evidence of such a relationship sensitivity analysis indicates that there is a contemporaneous negative relationship but also that in the long run and ignoring institutional factors the group of african countries plays the determining role

growth volatility and financial liberalization we examine the effects of both equity market liberalization and capital account openness on real consumption growth variability we show that financial liberalization is mostly associated with lower consumption growth volatility our results are robust surviving controls for business cycle effects economic and financial development the quality of institutions and other variables countries that have more open capital accounts experience a greater reduction in consumption growth volatility after equity market openings we also find that financial liberalizations are associated with declines in the ratio of consumption growth volatility to gdp growth volatility suggesting improved risk sharing our results are weaker for liberalizing emerging markets but we never observe a significant increase in real volatility moreover we demonstrate significant differences in the volatility response depending on the size of the banking and government sectors and certain institutional factors

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association

barriers to energy efficiency a comparison across the german commercial and services sector abstract based on a large sample for the german commercial and services sector this paper econometrically assesses the relevance of various types of barriers to energy efficiency at the sectoral level and across fifteen sub sectors the results at the level of entire sectors suggest that the lack of information about energy consumption patterns and about energy efficiency measures lack of staff time priority setting within organizations and in particular the investor user dilemma are all relevant barriers allowing for sector specific differences in the relevance of these individual barriers yields a more heterogeneous picture the numbers and types of relevant barriers vary across sub sectors and the majority of sub sectors are subject to relatively few barriers the statistically most significant barriers are found for the sub sector of public administrations these findings are robust independent of whether the definition of an organization s energy efficiency performance includes only measures that have actually been realized or also those that are being planned for planned projects however organizations appear to underestimate internal priority setting as a barrier to energy efficiency

survey evidence on the willingness of u s consumers to pay for automotive fuel economy abstract prospect theory holds that human beings faced with a risky bet will tend to value potential losses about twice as much as potential gains previous research has demonstrated that prospect theory could be sufficient to explain an energy paradox in the market for automotive fuel economy this paper analyzes data from questions added to four commercial multi client surveys of 1000 u s households each in 2004 2011 2012 and 2013 households were asked about willingness to pay for future fuel savings as well as the annual fuel savings necessary to justify a given upfront payment payback periods inferred from household responses are generally consistent over time and across different formulations of questions mean calculated payback periods are about 3 years but there is substantial dispersion among individual responses the calculated payback periods do not appear to be correlated with the attributes of respondents respondents were able to quantitatively describe their uncertainty about both vehicle fuel economy and future fuel prices simulation of loss averse behavior based on respondents stated uncertainty illustrates how loss aversion could lead consumers to substantially undervalue future fuel savings relative to their expected value

does balance among areas of institutional quality matter for economic growth countries with better institutions as measured by the economic freedom of the world index have greater prosperity growth and well being however the previous literature has ignored interrelationships among the subareas instead implicitly assuming substitutability and independence we hypothesize that when some areas are weak better scores in other areas are not a simple substitute we find that including a simple measure of the within country standard deviation among coexisting area scores results in a meaningfully significant improvement in the empirical growth specifications based on our findings this should become routine practice in future empirical work we also explore interactions among areas and find ones with legal system and property rights most important to include these findings suggest a need to reconsider the implicit assumption of independence among area scores as well as a balanced approach to institutional reform in practice improving the worst areas is more beneficial to growth

financial development financial fragility and growth the authors study the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity on the one hand the empirical growth literature finds a positive effect of financial depth as measured by for instance private domestic credit and liquid liabilities for example levine loayza and beck 2000 on the other hand the banking and currency crisis literature finds that monetary aggregates such as domestic credit are among the best predictors of crises and their related economic downturns for example kaminski and reinhart 1999 the authors account for these contrasting effects based on the distinction between the short and long run impacts of financial intermediation working with a panel of cross country and time series observations they estimate an encompassing model of short and long run effects using the pooled mean group estimator developed by pesaran shin and smith 1999 their conclusion from this analysis is that a positive long run relationship between financial intermediation and output growth coexists with a mostly negative short run relationship the authors further develop an explanation for these contrasting effects by relating them to recent theoretical models by linking the estimated short run effects to measures of financial fragility namely banking crises and financial volatility and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions

the efficiency paradox bureaucratic and organizational barriers to profitable energy saving investments abstract the paradox of why profitable energy saving investments are not undertaken continues to provoke debate the underlying phenomenon might be called the efficiency paradox because it represents a case in which business firms which are often presumed or taken axiomatically to be economically efficient make decisions that do not maximize profits new data from one of the us environmental protection agency s voluntary pollution prevention programs enables this paradox to be explored statistically the data show that both the level and variation in returns to lighting upgrade investments cannot be explained by standard economic models substantial gains in energy efficiency can be achieved without sacrificing profitability both economic and organizational factors account for some of the variation in observed returns to these investments but the results suggest a need for improved and more comprehensive theories of the investment behavior of firms and other organizations

making enduring choices uncertainty and public policy abstract this paper provides an experimental test of the theory of investment under uncertainty and applies the theory to a group of policy decisions investment under uncertainty describes a class of problems characterized by uncertainty that resolves itself over time sunk costs that cannot be fully recovered and the ability of the decision maker to wait without loss of strategic advantage it also implies a bad news principle under which decision makers are motivated by expected costs but not expected benefits the theory is illustrated as a two period model for which the decision maker can either invest in the first period and receive a known current return plus an uncertain future return or defer until the second period when uncertainty is resolved by foregoing current period benefits a cost that is sometimes referred to as an option value is incurred parameter values are specified and an experimental test the results of which closely track the predictions of the theory is described three cases the structuring of contingent valuation questionnaires the operalization of the precautionary principle in risk analysis and the development of public policy to stimulate private investments as for energy saving products are used to illustrate potential public policy applications

making the implicit explicit a look inside the implicit discount rate implicit discount rates idrs are employed in energy models to capture household investment decisions yet the factors behind the idr and their respective implications for policy making usually remain blurred and fractional the proposed comprehensive framework distinguishes three broad categories of factors underlying the idr for household adoption of energy efficient technologies eets preferences notably over time risk loss debt and the environment predictable ir rational behavior bounded rationality rational inattention behavioral biases and external barriers to energy efficiency existing empirical findings suggest that the factors underlying the idrs that differ across household characteristics and technologies should be accounted for in energy models furthermore the framework allows for a fresh look at the interplay of idrs and policies we argue that a simple observation of high idrs or observing correlations between idrs and socio economic characteristics does not provide guidance for policy making since the underlying sources cannot be identified instead we propose that some of the factors underlying the idr notably external barriers can be changed through directed policy interventions whereas other factors notably preferences and predictable ir rational behavior are innate and can only be taken into account through reactive policy interventions

energy paradox and political intervention a stochastic model for the case of electrical equipments abstract this paper develops a model that explains the delay of decisions to adopt profitable energy saving investments this problem is known as the energy paradox the model rationalizes the profitability requirements raised by the irreversibility the uncertainty and the decrease of costs as a result of learning by doing in this context the wait gives investors more visibility and more lower investment costs which gives them an option value the representative agent has an interest to postpone its energy saving decision until future benefits increase and equalize its required option value formally we internalize these explanatory factors in a stochastic model where the updated energy saving benefits follows a geometric brownian motion to affirm the capacity of the model we generate simulation results for two equipments for electrical uses beyond that we extend the model to simulate the effects of energy policy instruments to promote adoption of such equipments simulations prove that the taxation of energy prices is likely to be more effective than the subsidy for energy saving equipments it is also found that the combination of these instruments amplifies the adoption of energy saving equipments and generates very favorable economic and environmental externalities

dynamic incentives of environmental regulations the effects of alternative policy instruments on technology diffusion abstract we develop a framework for comparing empirically the effects of alternative environmental policy instruments on the diffusion of new technology market based and command and control approaches can he quantitatively compared by estimating the economic penalty that firms through their actions reveal to be associated with violation of standards in the context of concerns about global climate change we empirically examine the likely effects of pigouvian taxes technology adoption subsidies and technology standards we employ state level data on the diffusion of thermal insulation in new home construction comparing the effects of energy prices insulation cost and building codes

the economics of risks to life this study asks two questions 1 what is the net value to the representative individual over his life time of activities that alter age specific mortality risks 2 what is the cost to the representative individual of activities that take a life at random at a given age results derived from an economic demographic model with full age specific accounting have a strong actuarial flavor alterations in the mortality schedule caused say by a medical breakthrough should be assessed on the utility of expected additional life years production and reproduction less expected social costs of support loss of life at a specific age due to an accident say should be assessed on the opportunity costs of expected lost years of living lost production and reproduction less expected social support costs the results show that current methods in general leave out an important social transfer term that value of a life lost is highly age dependent and that the degree of diminishing returns to consumption is crucial in calculations of the economic cost of risks

the asymmetric effects of uncertainty on inflation and output growth we study the effects of growth volatility and inflation volatility on average rates of output growth and inflation for post war us data our results suggest that increased growth uncertainty is associated with significantly lower average growth while higher inflation uncertainty is significantly negatively correlated with lower output growth and lower average inflation both inflation and growth display evidence of significant asymmetric response to positive and negative shocks of equal magnitude copyright 2004 john wiley sons ltd

the role of income in energy consumption behaviour evidence from french households data the main purpose of this paper is to characterise quantitatively the impact of income on household energy consumption in the residential and transport sectors starting from the data collected in a paper survey we analyse the extent of the constraint experienced by households in terms of equipment purchasing behaviour and daily energy consumption this analysis shows that the least well off households are particularly constrained since the share of their budget represented by these energy services is very large 15 25 and this corresponds to a level of energy service well below that of the better off households the case of space heating shows a factor of 2 in terms of level of comfort achieved between the extreme 10 percentiles these households also face a strong capital constraint for equipment purchases this leads either to a large increase in the required rate of return or to a reduction in the proportion of households that are prepared to replace their equipment earlier the least well off households are thus doubly constrained since it is more difficult for them to invest in our opinion it is crucial to take into account this observation in the context of political measures aimed at reducing households co2 emissions

regional income effects and renewable fuels increased usage of renewable energy sources in danish rural areas and its impact on regional incomes co2 emission is a worldwide problem and in the attempt to reduce these emissions renewable energy sources may be considered serious alternatives to the present usage of fossil fuels as part of a research programme financed by the danish energy agency data concerning the different heating technologies based on oil and wood fuels have been collected private and social costs are estimated and these economic data are used when analysing regional income effects of increased consumption of fuels e g wood locally produced the impacts on income and tax revenues are calculated from multiplier expressions constructed with rights to the measurement of local effects

a closer look at financial development and income distribution this paper analyzes the under investigated relationship uniting financial development and income distribution we use a novel approach taking into account for the first time the specific channels linking banks capital markets and income inequality the time varying nature of the relationship and reciprocal causality we construct a set of annual indicators of banking and capital market size robustness efficiency and international integration we then estimate the determinants of income distribution using a panel bayesian structural vector autoregressive svar model for a set of 49 countries over the 1994 2002 period we uncover a significant causality running from financial sector development to income distribution in addition the banking sector seems to exert a stronger impact on inequality finally the relationship appears to depend on characteristics of the financial sector rather than on its size

price effects of energy efficient technologies a study of residential demand for heating and cooling energy efficient appliances reduce the marginal price of the services they deliver this article shows empirically that such price reductions result in energy savings that are smaller than those engineering techniques generally project using econometric techniques with data from a unique utility experiment and a detailed engineering thermal load model we find that actual conservation is as much as 13 below engineering estimates for cooling and 8 12 below for heating customers who conserve electricity are also persistent their houses are comparatively warmer in summer and cooler in winter

been top down so long it looks like bottom up to me abstract while technologists emphasize suboptimal choices by individuals and organizations many economists have ignored behavior exhibiting technical inefficiency this paper selectively discusses efforts by some economists to identify and measure technical inefficiency as applied to the energy efficiency gap bottom up economics would seek to measure significant departures from best practice technology distinguish between inefficiency that is more less wasteful of energy than other inputs and focus on developing testable hypotheses about technical inefficiency support for widespread intervention in energy use decisions may not necessarily follow from such an inquiry

how high are option values in energy efficiency investments high implicit discount rates in consumers energy efficiency investments have long been a source of controversy in several recent papers hassett and metcalf argue that the uncertainty and irreversibility attendant to such investments and the resulting option value account for this anomalously high implicit discounting using their model and data we show that to the contrary their analysis falls well short of providing an explanation of this pattern

emission permit banking pollution abatement and production inventory control of the firm abstract in this paper we present a dynamic model modified with emission permit banking and pollution abatement and investigate the effect of emission permit banking and pollution abatement on the production inventory strategy of the firm after introducing emission permit banking and pollution abatement the cost function consists of the inventory holding and production costs the cost of investment in abatement capital goods and the emission procurement selling cost furthermore the inventory holding costs are linear production costs are non decreasing and convex functions of the production level and the costs of investment in abatement capital goods are increasing and convex functions of the investment level we compare the optimal production inventory strategy before emission permit banking and pollution abatement and thereafter the mathematical investigation is based on the arrow karlin model

oil and energy price volatility it is commonly believed that since the 1973 oil crisis oil and energy prices have been more volatile than other commodity prices this study examines monthly producer prices for thousands of products over the period january 1945 through august 2005 the results show that crude oil refined petroleum and natural gas prices are more volatile than prices for about 95 of products sold by domestic producers relative to crude commodities however crude oil prices are currently more volatile than about 65 of other products and oil price volatility first exceeded the median for crude commodities following the 1986 drop in oil prices

exploring the potential for energy conservation in french households through hybrid modeling although the building sector is recognized as having major potential for energy conservation and carbon dioxide emissions mitigation conventional bottom up and top down models are limited in their ability to capture the complex economic and technological dynamics of the sector this paper introduces a hybrid framework developed to assess future household energy demand in france res irf a bottom up module of energy consumption for space heating has several distinctive features i a clear separation between energy efficiency i e investment in energy efficient technologies and sufficiency i e changes in the utilization of energy consuming durables which allows the rebound effect to be assessed ii the inclusion of barriers to energy efficiency in the form of intangible costs consumer heterogeneity parameters and the learning by doing process iii an endogenous determination of retrofitting which represents trade offs between retrofit quantity and quality subsequently res irf is linked to the imaclim r computable general equilibrium model this exercise shows that compared to a 37 reduction in final energy demand achievable in business as usual in existing dwellings an additional reduction of 14 could be achieved if relevant barriers to efficiency and sufficiency were overcome

does the energy efficiency paradox exist technological progress and uncertainty we explain why firms may choose not to undertake investments inenergy saving technologies that appear profitable from a net presentvalue perspective as future technological advances are inherentlyuncertain and investments in new technology are at least partly irreversible it may pay to postpone investments in energy savingand wait for the arrival of improved varieties this insight casts doubton the existence of so called low hanging fruits in energy saving although we do not wish to deny that organisational failures may alsobe important failure to appreciate the underlying stochasticity oftechnological progress may obscure the insight that there is value inwaiting and costs involved in terminating the option to invest theappetite for low hanging fruits will be less when these costs areincorporated in the analysis we demonstrate that the effect of thearrival rate of new technologies on the adoption lag for a rational firmis ambiguous the same holds for the effect of the expected jump inefficiency of new technologies government policies aimed at enhancingthe adoption of new technologies through stimulation of r d maytherefore be counterproductive

the experience curve option value and the energy paradox abstract this paper develops a model to explain the energy paradox the inclination of households and firms to require very high internal rates of return in order to make energy saving investments the model abstracts from many features of such investments to focus on their irreversibility the uncertainty of their future payoff streams and the investor s anticipation of future technological advance in this setting the decision to invest in energy saving technology can be delayed providing option value in addition delay allows the potential investor to cash in on future experience curve effects with the passage of time firms gain practical knowledge in producing and installing the energy saving technology enabling them to reduce the technology s up front cost per unit of energy saved we incorporate these fundamentals into a stochastic model where the investment s discounted benefits follow geometric brownian motion to demonstrate the model s capabilities we generate simulation results for photovoltaic systems that highlight the experience curve effect as a fundamental reason why households and firms delay making energy saving investments until internal rates of return exceed values of 50 and higher consistent with observations in the economics literature we also explore altruistic motivations for energy conservation and the model s implications for both additionality and the design of energy conservation policy

beyond the stern review lessons from a risky venture at the limits of the cost benefit analysis this paper argues that debates amongst economists triggered by the stern review are partly relevant focusing on key parameters translating real ethical issues and partly misplaced in that they do not consider enough other determinants of climate change damages i the specifications of the utility function used for the assessments preference for the environment preference for smooth growth paths ii the interplay between uncertainty and the sequentiality of the decision and iii whether the growth engines behind the integrated assessment models can account for transient disequilibrium and sub optimality we derive some suggestions for any future research agenda in integrated assessment modelling whatever the position of the analysts about the relevance of the intertemporal optimisation framework and the bayesian approach to uncertainty in the climate affair

inflation output growth and nominal and real uncertainty empirical evidence for the g7 abstract we use univariate garch models of inflation and output growth and monthly data for the g7 covering the 1957 2000 period to test for the causal effect of real and nominal macroeconomic uncertainty on inflation and output growth and the effect of inflation on inflation uncertainty our evidence supports a number of important conclusions first inflation is a positive determinant of uncertainty about inflation second output growth uncertainty is a positive determinant of the output growth rate third there is mixed evidence regarding the effect of inflation uncertainty on inflation and output growth hence uncertainty about the inflation rate is not necessarily detrimental to economic growth finally there is not much evidence supporting the hypothesis that output uncertainty raises inflation

the misuse of net present value in energy efficiency standards abstract consumers are often blamed for not making necessary investments in energy efficient durables despite that these investments have positive net present value npv several papers have argued that when investments have option like characteristics e g irreversibility uncertainty flexible timing and lumpiness the aphorism invest if the net present value of investing exceeds zero isn t the best advice yet curiously the department of energy doe in the united states proposes new regulations mandating higher energy efficiency standards for consumer durables on the basis of non negative npv over an investment s lifetime in this paper we provide a step by step deconstruction of doe s npv methodology and show that doe s method purges volatility volatility persistence and nonstationarity that are otherwise present in energy prices as a result doe s projections of future energy prices are artificially smooth and statistically biased casting serious doubt on the reliability of the magnitude of energy savings from energy efficient durables

energy burden alleviation and greenhouse gas emissions reduction can we reach two objectives with one policy in this article we assess french current public policies designed to reduce greenhouse gas ghg emissions and abate household energy burden through a simulation of changes in residential sector characteristics over the long run we build on an existing partial equilibrium model to take into consideration key determinants of excessive energy burden among vulnerable households this analysis reveals that current public policies are not sufficient to reach the ambitious objectives for reducing energy consumption and ghg emissions in france moreover the decreases that might occur mask significant social disparities across households the joint implementation of multiple instruments leads to interactions that diminish overall policy outcomes overall current public policies produce estimated free riding rates of 75 energy efficiency measures are thus insufficient in themselves the government should focus more on monetary poverty as a cause of low home improvement rates and consider subsidizing renovation costs as a potential solution

energy conservation investment do consumers discount the future correctly we argue that the apparently high discount rates attributed to investors making energy conservation investments are not irrational or the result of some market failure rather they may result from an investor recognizing that many conservation investments entail substantial sunk costs in the presence of these costs and uncertainty over future conservation savings consumers should use a higher hurdle rate for investment than if there were no uncertainty simulations suggest that the hurdle rate should be about four times greater than the standard rate an implication of our model is that tax subsidies for the purchase of conservation capital are likely to be ineffective we discuss alternative policy approaches which are more likely to increase energy efficient investment namely mandatory efficiency standards and energy taxes

promoting clean energy investment an empirical analysis of property assessed clean energy abstract from 2008 to 2010 a handful of property assessed clean energy pace programs offered property secured loans to homeowners for residential clean energy investments this analysis uses difference in differences models and synthetic counterfactual models to estimate the effect of three california pace programs on residential photovoltaic installations while pace programs do not offer superior terms to other solar financing options we find that pace financing increases solar installations by approximately 3 8 watts per owner occupied household per quarter a 108 increase over the mean watts per owner occupied household

demand side management overcoming market barriers or obscuring real costs abstract this paper compares two approaches to estimating the net benefits of a demand side management program that subsidizes the purchase of efficient equipment the total resource cost trc test suggests net benefits of us 6 9 million estimates based on consumer s surplus yield an estimated net loss of us 6 3 million this gap is due to differences in estimates of participants net benefits market failures do not appear to be significant and thus cannot explain much of the gap the more plausible explanation is that the trc uses a lower discount rate than participants use for themselves and it omits some costs

factors influencing willingness to pay for the energy star label abstract in the united states nearly 17 of greenhouse gas emissions come from residential energy use increases in energy efficiency for the residential sector can generate significant energy savings and emissions reductions consumer labels such as the us environmental protection agency s energy star promote conservation by providing consumers with information on energy usage for household appliances this study examines how the energy star label affects consumer preferences for refrigerators the results of an online survey of a national sample of adults suggest that consumers are on average willing to pay an extra 249 82 349 30 for a refrigerator that has been awarded the energy star label furthermore the results provide evidence that respondent willingness to pay was motivated by both private energy cost savings and public environmental benefits

efficiency effectiveness and implementation feasibility of energy efficiency rebates the renove plan in spain abstract state sponsored incentive policies frequently include subsidies or rebates for the purchase of more efficient appliances however more research is required into the effects of this tool in isolation a case in point is the so called renove plan in spain first the inefficiency losses dead weight losses associated with energy efficiency rebates must be taken into account such a policy may also encourage the large scale purchasing of energy efficient appliances which may finally result in an increase in electricity consumption rebound effect furthermore although a subsidy is more widely accepted than other tools from social and political viewpoints especially than taxes the fiscal consolidation challenge faced by many countries reduces the scope for environmental policy measures on the expenditure side of the budget and strengthens the need to use taxes to meet the agreed policy objectives this paper shows that the current application of the spanish renove plan with rebates on the dishwasher market for energy efficient appliances generates some welfare losses a rebound effect and a considerable deficit in public budgets the paper examines and assesses the effect of different combinations of taxes and rebates in the case of dishwashers in spain based on their performance in terms of economic efficiency environmental effectiveness and implementation feasibility

energy efficiency economics and policy energy efficiency and conservation are major factors in the reduction of the environmental impact of the energy sector particularly with regard to climate change energy efficiency also contributes to reducing external dependence and vulnerabilities in the energy domain in this paper we discuss the factors that influence energy efficiency and conservation decisions and the most appropriate policies for their promotion although not all public policies seem justified we argue that specific policies for promoting energy conservation may be required preferably based on economic instruments or on the provision of information to consumers

when the carrot goes bad the effect of solar rebate uncertainty abstract although meant to encourage investment in solar photovoltaic pv systems some incentive policies may themselves become a barrier in instances where policy related uncertainty is present as potential solar adopters delay their investment until uncertainty is resolved this study utilizes a quasi experimental setting to quantify the effect of solar policy uncertainty focusing on the california solar initiative s residential rebate program i exploit the temporary exhaustion of funds within one of the utility territories as an exogenous source of increased uncertainty and estimate that it leads to a 67 drop in rebate applications in an average zip code week there is considerable heterogeneity in this effect depending on household income and pv system size among households that are least likely to invest in pv without a rebate incentive program participation drops by up to 69 this suggests potentially significant loss in program effectiveness due to lower pv adoption and underscores the importance of accounting for uncertainty in policy evaluations

a novel approach to forecast electricity price for pjm using neural network and similar days method price forecasting in competitive electricity markets is critical for consumers and producers in planning their operations and managing their price risk and it also plays a key role in the economic optimization of the electric energy industry this paper explores a technique of artificial neural network ann model based on similar days sd method in order to forecast day ahead electricity price in the pjm market to demonstrate the superiority of the proposed model publicly available data acquired from the pjm interconnection were used for training and testing the ann the factors impacting the electricity price forecasting including time factors load factors and historical price factors are discussed comparison of forecasting performance of the proposed ann model with that of forecasts obtained from similar days method is presented daily and weekly mean absolute percentage error mape of reasonably small value and forecast mean square error fmse of less than 7 mwh were obtained for the pjm data which has correlation coefficient of determination of 0 6744 between load and electricity price simulation results show that the proposed ann model based on similar days method is capable of forecasting locational marginal price lmp in the pjm market efficiently and accurately

diffusion of renewable heating technologies in households experiences from the norwegian household subsidy programme abstract a sample of 896 norwegian households participating in a subsidy programme was surveyed in order to evaluate the success of the programme the programme subsidised investments in new heating technologies including heat pumps and pellet stoves the success of the programme was measured by the degree of overall satisfaction with the investment by the sampled households theories on diffusion of innovations and planned behaviour motivate the empirical modelling of the investment satisfaction the economic return on the investment varied substantially both within and between the two heating technologies with heat pumps outperforming pellet stoves in this respect still the economic return showed no explanatory power toward the investment satisfaction of the household among the economic variables only the electricity price had any influence on investment satisfaction technical quality indoor climate and heat comfort and the availability of the supplier of the heating equipment were the most important explanatory variables

the link between macroeconomic performance and variability in the uk abstract this paper examines the link between inflation output growth and their respective variabilities we employ a bivariate garch model which incorporates mean and level effects to investigate in a unified empirical framework all the possible interactions between the four variables we show that not only does variability affect performance but the latter influences the former as well specifically inflation has a positive impact on both variabilities

returns on investments in energy saving technologies under energy price uncertainty in dutch greenhouse horticulture conventional net presentvalue calculations evaluating the profitabilityof investments in energy saving technologies indutch horticultural outlays predict a muchhigher rate of adoption of these technologiesthan is actually observed this paper tries toexplain this gap by applying a real optionsframework hurdle rates for investments in twotypes of energy saving technology are estimatedusing simulated future revenue streams givenuncertainty regarding energy prices and energytax policies hurdle rates found in this wayare on average about 1 76 times the hurdlerates that result from net present valuecalculations furthermore this paper tests thepredictive value of the theory by estimating alogit model this model relates the incidenceof having invested in an energy savingtechnology to the difference between the returnon investment and the hurdle rate thepredictive power turns out to be encouraging as the statistical tests indicate that higherhurdle rates tend to reduce rates of technologyadoption

subjective discount rates in the general population and their predictive power for energy saving behavior why do people sometimes refrain from saving energy even if it would pay off in monetary terms subjective discount rates present one possible explanation for this lack of foresight but little is known about their level and reliability in the general population with regard to behavior persons with lower discount rates are expected to accept additional costs upfront more readily than those with higher discount rates based on a representative nation wide study the swiss environmental survey 2007 and a follow up survey our analyses reveal that on average subjective discount rates are well above market interest rates and moderately stable over a time interval of four years income and education are negatively correlated with discount rates contrary to expectations we did not find convincing support for an impact of discount rates on energy saving behavior

explaining the energy efficiency gap expected utility theory versus cumulative prospect theory abstract energy efficiency is one of the key factors in mitigating the impact of climate change and preserving non renewable resources although environmental and economic justifications for energy efficiency investments are compelling there is a gap between the observable and some notion of optimized energy consumption the so called energy efficiency gap behavioral biases in individual decision making have been resonated by environmental research to explain this gap to analyze the influence of behavioral biases on decisions upon energy efficiency investments quantitatively we compare expected utility theory with cumulative prospect theory on basis of a real world example we illustrate how the extent of the gap is influenced by behavioral biases such as loss aversion probability weighting and framing our findings indicate that cumulative prospect theory offers possible explanations for many barriers discussed in literature for example the size of the gap rises with increased risk and investment costs because behavioral biases are systematic and pervasive our insights constitute a valuable quantitative basis for environmental policy measures such as customer focused and quantitatively backed public awareness campaigns financial incentives or energy savings insurances in this vein this paper may contribute to an accelerated adaption of energy efficiency measures by the broader public

time series properties of the renewable energy diffusion process implications for energy policy design and assessment confronted by increasingly tight budgets and a broad range of alternative options policy makers need empirical methods to evaluate the effectiveness of policies aimed at supporting the diffusion of renewable energy sources res rigorous empirical studies of renewable energy policy effectiveness have typically relied on panel data models to identify the most effective mechanisms a common characteristic of some of these studies which has important econometric implications is that they assume that the contribution of res to total electricity generation will be stationary around a mean this paper reviews such assumptions and rigorously tests the time series properties of the contribution of res in the energy mix for the presence of a unit root to that end we use both individual and panel unit root tests to determine whether the series exhibit non stationary behavior at the country level as well as for the panel as a whole the analysis applied to a panel of 19 oecd countries over the period 1990 2012 provides strong evidence that the time series of the renewable share of electricity output are not stationary in 17 of the 19 countries examined this finding has important implications for energy policy assessment and energy policy making which are discussed in the paper

one switch utility functions and a measure of risk consider the relative attractiveness to a decision maker of two financial gambles as the wealth of that individual varies it may seem reasonable that either one alternative should be preferred for all wealth levels or that there exists a unique critical wealth level at which the decision maker switches from preferring one alternative to the other decreasing risk aversion is not sufficient for this property to hold we identify the small class of utility functions for which it does we show how the property leads naturally to a measure of risk the results of this paper apply equally well to discounting functions for cash flows one switch discount functions permit at most one change in preference between cash flows as all payoffs are deferred in time

the structure of energy efficiency investment in the uk households and its average monetary and environmental savings abstract socioeconomic and behavioural variables that influence the household s adoption of energy efficiency measures such as cavity and loft insulation and upgrades to the boiler are identified contrary to previous literature by extending brechling and smith s 1994 and hassett and metcalf s 1995 models it is shown that the application of the energy act 2011 which contains provisions on the green deal the new energy company obligation eco and the private rented sector needs to follow a tailored strategy to reach the low adoption households identified by my model moreover for the current adopters of the analysed measures average monetary and environmental adoption benefits are estimated based on parti and parti s 1980 demand model these estimates are smaller than their expected values showing an important energy efficiency gap in the sector particularly low cost measures can bring important savings that can help to meet the pay as you save rule i e the golden rule of the new regulation my model also shows that a poor state of dwelling repair can reduce the adoption benefits increasing the need of subsidies that will be financed through consumer s energy bills however this can increase the number of households in fuel poverty

measuring risk reduction benefits with discounted longevity there are many ways to assess the benefits and costs of risk reduction policies this paper shows that discounted longevity as a measure of benefits and the negative of net output as a measure of costs can be deduced from the shepard and zeckhauser utility maximization model

is there an energy efficiency gap many analysts have argued that energy efficiency investments offer an enormous win win opportunity to both reduce negative externalities and save money this overview paper presents a simple model of investment in energy using capital stock with two types of market failures first uninternalized externalities from energy consumption and second forces such as imperfect information that cause consumers and firms not to exploit privately profitable energy efficiency investments the model clarifies that only if the second type of market failure cannot be addressed directly through mechanisms such as information provision energy efficiency subsidies and standards may be merited this chapter therefore reviews the empirical work on the magnitude of profitable unexploited energy efficiency investments a literature which frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured these problems notwithstanding recent empirical work in a variety of contexts implies that on average the magnitude of profitable unexploited investment opportunities is much smaller than engineering accounting studies suggest finally there is tremendous opportunity and need for policy relevant research that utilizes randomized controlled trials and quasi experimental techniques to estimate the returns to energy efficiency investments and the welfare effects of energy efficiency programs

beyond case studies barriers to energy efficiency in commerce and the services sector to assess the empirical relevance of various barriers to the diffusion of energy efficient measures we conduct econometric analyses for 19 sub sectors in the german commercial and services sectors results from estimating a separate logit model for each sub sector suggest that the most important barriers are the investor user dilemma and the lack of information about energy consumption patterns typically multiple types of barriers are found to be statistically significant but they vary considerably across sub sectors finally we discuss policy implications for the most relevant barriers

common factors in latin america s business cycles this paper constructs new business cycle indices for argentina brazil chile and mexico based on common dynamic factors extracted from a comprehensive set of sectoral output external trade fiscal and financial variables the analysis spans the 135 years since the insertion of these economies into the global economy in the 1870s the constructed indices are used to derive a business cycle chronology for these countries and characterize a set of new stylized facts in particular we show that all four countries have historically displayed a striking combination of high business cycle volatility and persistence relative to benchmark countries and that such volatility has been time varying with important differences across policy regimes we also uncover a sizeable common factor across the four economies which has greatly limited scope for regional risk sharing

california energy efficiency lessons for the rest of the world or not abstract since the 1970s california s residential electricity consumption per capita has stopped increasing while other states electricity use continued to grow steadily what accounts for california s apparent savings some credit the strict energy efficiency standards for buildings and appliances enacted by california in the mid 1970s they argue that the growing gap between california and other states demonstrates that other states and countries could replicate california s gains by adopting california style regulations and that california should build on its own success by tightening its standards further skeptics might point to three long run trends that differentiate california s electricity demand from other states 1 shifting of the u s population toward warmer climates of the south and west 2 relatively small income elasticity of energy demand in california s temperate climate and 3 evolving differences between the demographics of households in california and other states today differences in climate and demographics account for almost 90 percent of the difference between california s and other states residential electricity use that difference thus provides no lessons for other states or countries considering adopting or tightening their own energy efficiency standards

from riches to rags and back institutional change financial development and economic growth in argentina since 1890 abstractargentina is the only country in the world that in 1900 was developed and in 2000 was developing although economic historians have identified and explored various possible explanations chiefly institutions political instability financial development inflation trade openness and international financial integration no study so far has attempted a comprehensive quantitative assessment of their relative importance this article tries to fill this gap using the power arch framework and annual data since 1896 to study the effects of these factors in terms of both growth and growth volatility the results highlight two main factors to understand the remarkable growth trajectory of argentina over the very long run financial development and institutions formal and informal political instability and stress the importance of differences in their short vis a vis long run behaviour

three reasons to use annual payments in contingent valuation surveys convergent validity discount rates and mental accounting abstract we present three arguments for using ongoing annual payments in contingent valuation cv surveys that estimate the benefit of a long lasting environmental improvement first by matching the duration of the payments with the duration of the environmental benefits survey respondents are spared from performing complicated present value calculations second willingness to pay wtp estimates from cv surveys that include ongoing annual payments best match wtp estimates obtained using travel cost surveys third respondents are less likely to face binding mental budget constraints with ongoing annual payments than with a larger one time payment in addition respondents discount rates may be estimated by collecting non hypothetical individual time preference data as part of the valuation survey

growth volatility and political instability non linear time series evidence for argentina 1896 2000 abstract we investigate the growth volatility political instability relationship in a power arch framework for argentina 1896 2000 main finding is that while informal political instability e g assassinations has a direct negative effect on economic growth formal instability has an indirect impact through growth volatility

financial development industrialization the role of institutions and government a comparative analysis between india and china this research is the first comparative attempt incorporating the role of economic demographic sectoral contribution government and trade in explaining financial development for india and china

do consumers discount the future correctly a market based valuation of residential fuel switching abstract dsm and energy efficiency options are generally evaluated using engineering oriented discounted cash flow procedures which value all cost and benefit streams using a single arbitrary discount rate usually the firm s weighted average cost of capital wacc the wacc based approach ignores financial risk and hence leads to unreliable results in a recent paper in this journal hassett and metcalf depart from this tradition they reflect financial risk by simulating the total variability of returns from energy saving investments their findings indicate that dsm projects are potentially risky suggesting that the net benefits must be discounted at significantly higher rates thus lowering their present values this paper presents a market based evaluation of a particular dsm option residential fuel switching using the capital asset pricing model capm under the capm approach a risk adjusted market based discount rate is estimated for each cost stream fuel maintenance and avoided outlays for electricity the market based results which reflect the systematic risk of each cost stream suggest that fuel switching is probably not cost effective because it is considerably more risky than indicated by a wacc based analysis this supports hassett and metcalf s conclusion that consumers who reject dsm projects are not necessarily acting irrationally

the role of risk and trust attitudes in explaining residential energy demand evidence from the united kingdom recent research into the determinants of household energy consumption has aimed to incorporate findings from economics sociology and psychology in order to obtain a more comprehensive understanding of the factors determining energy demand the current paper contributes to this nascent stream of literature by studying the relationship between risk attitudes trust propensity and energy consumption at the household level drawing on the british household panel survey a well known data set in the context of energy studies i show that trust is negatively correlated with household energy demand while higher risk tolerance leads to increases in residential energy use potential explanations for these findings are investigated suggesting that risk preferences may be related with overall appliance stock and the size of the rebound effect

saving money vs investing money do energy ratings influence consumer demand for energy efficient goods abstract the article analyses economic barriers leading to the energy efficiency gap in the market for energy using products by observing several million transactions in the uk over two years the empirical exercise estimates aids models for refrigerators washing machines tvs and light bulbs results indicate that market barriers are crucial in the demand for energy efficient options and consumer response to changes in appliance prices total expenditures and energy prices depends on the possibility of behavioural adjustments in consumption in contrast with the induced innovation hypothesis current electricity prices can fail to induce innovation because of their short term impact on disposable income while consumers invest in energy efficiency when expecting electricity prices to rise in the future

adoption of residential solar power under uncertainty implications for renewable energy incentives abstract many incentives at the state and federal level exist for household adoption of renewable energy like solar photovoltaic pv panels despite generous financial incentives the adoption rate is low we use the option value framework which takes into account the benefit of delaying investment in response to uncertainty to examine the decision by households to invest in solar pv using a simulation model we determine optimal adoption times critical values of discounted benefits and adoption rates over time for solar pv investments using data from massachusetts we find that the option value multiplier is 1 6 which implies that the discounted value of benefits from solar pv needs to exceed installation cost by 60 for investment to occur without any policies median adoption time is eight years longer under the option value decision rule compared to the net present value decision rule where households equate discounted benefits to installation cost rebates and other financial incentives decrease adoption time but their effect is attenuated if households apply the option value decision rule to solar pv investments results suggest that policies that reduce the uncertainty in returns from solar pv investments would be most effective at incentivizing adoption

driving forces of rapid co2 emissions growth a case of korea abstract this study aims to investigate korea s final demand structure and its impacts on co 2 emissions in order to reduce co 2 emissions and develop environmental policy directions based on the environmentally extended input output model this study adopts a two step approach 1 to estimate the embodied emissions and their intensities for 393 sectors induced by final demand and 2 to calculate the driving factors of emission growth between 2003 and 2011 and then evaluate the result by using structural decomposition analysis sda the findings of this study demonstrate that the impact of composition change in export with less embodied emission intensities tends to offset the increase in co 2 emission by the export scale growth the relatively low residential electricity price has resulted in the rapid growth of household electricity consumption and significantly contributed to emissions growth the result of sda indicates that korea s final demand behavior yielded high carbonization over the same period the findings suggest that korean government should promote exports in industries with less embedded co 2 in order to protect environments in addition emission information of each product and service should be provided for consumers to change their purchase patterns towards contributing to low carbon emissions as active players

evaluating energy efficiency investments accounting for risk in the discounting process a prominent feature of the literature regarding the economics of energy conservation is the debate over the existence and nature of the so called efficiency gap a frequent subject of debate is whether consumers apply a reasonable discount rate when evaluating the future benefits of energy efficiency measures a key aspect of the discounting debate is the manner in which consumer attitudes toward risk are accounted for when discounting this paper suggests that an appropriate approach to incorporating risk into the evaluation of energy efficiency projects would yield higher net benefits to such projects than standard evaluation techniques we argue that analysing the purchase of fuel saving capital as though it were a standard investment in a physical asset obscures an important feature of the decision rather than deciding whether or not to invest in an asset with an uncertain future benefit stream the consumer is actually choosing between two future cost streams each of which is uncertain this seemingly minor change in perspective has important implications for how the risk associated with fuel saving capital should be brought into the discounting process an example based on lighting technologies is used to illustrate the principles discussed

uncertainty loss aversion and markets for energy efficiency increasing energy efficiency is critical to mitigating greenhouse gas emissions from fossil fuel combustion reducing oil dependence and achieving a sustainable global energy system the tendency of markets to neglect apparently cost effective energy efficiency options has been called the efficiency gap or energy paradox the market for energy efficiency in new energy using durable goods however appears to have a bias that leads to undervaluation of future energy savings relative to their expected value this paper argues that the bias is chiefly produced by the combination of substantial uncertainty about the net value of future fuel savings and the loss aversion of typical consumers this framework relies on the theory of context dependent preferences the uncertainty loss aversion bias against energy efficiency is quantifiable making it potentially correctible by policy measures the welfare economics of such policies remains unresolved data on the costs of increased fuel economy of new passenger cars taken from a national research council study illustrate how an apparently cost effective increase in energy efficiency would be uninteresting to loss averse consumers