percent, while household with no access to the tool increase their consumption by 0.7 percent.

- _Missing markets or institutions._ Specific institutional measures can be required to transform the “right price” into the right incentive.  Thus principal-agent issues can prevent tenants from improving their home energy efficiency (Box 7). These are also examples where correcting the environmental externality also correct an economic externality and increase efficiency.

# **Box 7. Institutional schemes to distribute energy efficiency investments across tenants and owners.**

There is a large potential of cost-effective energy savings in the residential sector, and thus a potential for increasing the efficiency of the economy, represented by the term in Equation (2).

In Germany, tenants represent 51% of households, which is the highest share in Europe. Moreover, two third of rented apartments are owned by households, social housing being only a minor part of the housing market (7%). It is thus crucial to implement policies and measures to incentivize owners to improve energy efficiency in rented apartment. Rents are bounded by a reference rent at the beginning of the lease, and their increase during the lease are bounded by the “comparable regional rent”, established in €/m2, for each city and as a function of the apartment characteristics. The law however authorizes rent increase during a lease, in case of investments that “increase quality of life” or “reduce water or energy consumption”. In this case, the rent can reach 120% of the comparable regional rent. The rent increase is calculated on the basis of the “transferable” costs, equal to total investment costs reduced by what is considered a maintenance cost and by the financial support provided to owners. The rent increase is bounded at 11% per year of the transferable costs, which means that – for the owner – the investment is paid off in at most 10 years.

In France, the ADEME (Agence De l’Environnement et de la Maîtrise de l’Energie) provides examples energy efficiency investments that have been shared between owners and tenants in a win-win manner. The private residence “Les Castors”, in Bron, is composed of 4 buildings and 32 dwellings. The owner invested 430 k€ in energy efficiency in the building, i.e. 200€/m2 or 13 k€ per apartment. The investment has been financed for 25% by subsidies and for 25% by an increase in rent by an average of 15€/months/apartment. For the owner, the operation paid for itself in 10 years thanks to increased rents. For tenants, the increase in rent by 15 €/m2/apartment has been more than compensated by a 35€/month/apartment reduction in energy expenditure. To generalize this type of investment, the ADEME proposes a distribution rule for energy efficiency investment in building. Such a rule has to be (i) secure, i.e. it has to make sure that the overall housing cost does not increase for the tenant and that the owner can recoup its investment; (ii) transparent, i.e. includes only investment in energy efficiency and not normal maintenance costs; (iii) balanced, i.e. the cost transferred to tenants should not exceed owner investments; (iv) simple, i.e. easy to calculate to avoid costly legal conflicts between owners and tenants. The ADEME proposed rule is to have an annual transferred cost equal to 75% of the annual investment cost for the owner, in the limit of 75% of energy savings made by the tenant. The annual investment cost is equal to the annualized total investment costs reduced by the amount of financial support and the amount corresponding to normal maintenance expenditures.

Source: ADEME, Réhabilitation du parc locatif privé, Stratégie & Etudes n°18, February 2009.

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