Managing energy demand with information and standards [electronic resource]
Keywords: Management Science and Engineering

Energy efficiency, the notion that we can provide the same or comparable amount of energy services with less energy, is at the core of demand-side energy policies in the US, and elsewhere. The economics of energy efficiency policies is however controversial. While engineering calculations have repeatedly suggested that the full technical potential for energy efficiency is far to be realized, economists have pointed out that moving closer to the full potential is desirable to the extent that it delivers net benefits to society. The point of contention is that many practitioners and researchers believe that the observed investments in energy efficiency are systematically below their socially optimal levels, a phenomenon known as the energy efficiency gap, but it is still much debated how big is the gap, why it arises, and whether it commands policy interventions. The first goal of this dissertation is to propose a new conceptual framework to formalize the energy efficiency gap. Using the paradigm of transaction cost economics, I re-frame the concept of behavioral failure in a way consistent with standard welfare economics. In my framework, the fact that consumers may not account fully for energy costs (or may have biased perceptions) is rationalized by the existence of transaction costs to collect and process energy information. The second goal is to apply the framework to conduct a welfare analysis of one particular policy, the Energy Star certification program. The Energy Star certification is a voluntary labeling program managed by the US Environmental Protection Agency (EPA) that favors the adoption of energy efficient products. There are several rationales to focus on this program. First and foremost, Energy Star is one of the most important US policies aimed at improving energy efficiency, but rigorous evaluations of the program remain scant. Second, Energy Star is a policy that relies primarily on information and standards to influence consumers, which from a program evaluation standpoint, raises a number of methodological issues. The goal of my empirical application is thus to contribute to the policy debate, while proposing a novel methodology to analyze information-based policies. In Chapter 2, I use unique micro-data on the US refrigerator market to show that consumers respond to certification in different ways. Some consumers appear to rely heavily on Energy Star and pay little attention to electricity costs, others are the reverse, and still others appear to be insensitive to both electricity costs and Energy Star. I then develop a structural model of demand to conduct a welfare analysis of the program. The third goal is to investigate the role of firms' behaviors in determining the equilibrium outcomes of demand-side policies. The rationale here is that ignoring firms' responses may lead to grossly over or under-estimate the effects of policies aimed at consumers. In Chapter 3, I first shows that Energy Star influences firms decisions. Focusing on the refrigerator market, firms offer products that bunch exclusively at the minimum and Energy Star standards. I also find some evidence that consumers' valuation of the Energy Star certification is factored into pricing decisions. The second part of this chapter uses an oligopoly model estimated for the US refrigerator market to investigate firms' product lines and pricing decisions under various scenarios. I show that in a world without Energy Star firms might discriminate less in the energy efficiency dimension. This has important implications in determining the welfare effects of the program, and ultimately for the design of voluntary energy efficiency standards. In Chapter 4, I use the structural demand model and the oligopoly model to simulate the effects of the Energy Star program on the US refrigerator market. My results suggest that the program may lead to important energy savings, and improve social welfare. Moreover, Energy Star is particularly desirable in a world where there are different market failures interacting with one another. For instance, I find that the Energy Star certification may help firms to exercise market power, which, surprisingly, could benefit to consumers because the certification leads to a greater diversity of products in equilibrium. More generally, the welfare analysis yields a number of important insights on the interplay of demand-side policies and market structure.