State and US Regional Policies

Belt and Suspenders and More: A Look at the Incremental Impact of Energy Efficiency Subsidies

Sep 25, 2014 | Sebastien Houde, Joseph E. Aldy

Lawmakers employ a number of policy instruments to promote energy efficiency, including regulatory mandates, information campaigns, and technology subsidies. For energy-consuming durable goods, consumers often purchase products ultimately eligible for a subsidy because of their design under an energy efficiency standard and marketing subject to government-required information disclosure policies. Appliances such as refrigerators, dishwashers, and clothes washers, for example, fall into this category—they are subject to minimum energy efficiency standards set at the federal level and eligible for various rebates and tax credits, and manufacturers are required to disclose typical annual energy usage. Against the reality of limited resources and in a complicated landscape of overlapping, often redundant policy tools in play, what is the incremental impact of energy efficiency subsidies on energy outcomes, and why is it important?

In a new RFF discussion paper, we investigate the impact of the largest subsidy program for energy efficient appliances implemented in the United States.  Determining the incremental impact of subsidies in this context is important for three reasons. First, subsidy instruments, such as tax credits and rebates, have frequently been “turned on” for short periods of time and then “turned off” (for example, through the one-time 2009 economic stimulus bill, occasional tax extender bills, and occasional utility rebate programs). For this reason, subsidies, in practice, appear to be a marginal policy measure where energy efficiency is concerned. Second, subsidies are the marginal policy lever on the extensive margin, which facilitates our analysis since we clearly observe when the programs turn on and off, in contrast to the gradual changes in the revision of minimum efficiency standards and mandatory information disclosure. Third, such subsidies may be employed to an even greater extent in the future, making current analysis important for future decisionmaking.

To quantify the impact of subsidies on energy outcome, we examined the State Energy Efficient Appliance Rebate Program (SEEARP). Informally known as “Cash for Appliances,” the program delivered $300 million to state governments to fund rebates to consumers purchasing residential appliances certified by the US Environmental Protection Agency’s (EPA) Energy Star program. We estimate the energy savings for the three major appliance categories that attracted the most funds: refrigerators, clothes washers, and dishwashers. Our results indicate that the program did not have a meaningful impact on overall electricity consumption. For example, the average energy savings for refrigerator rebate programs was a statistically significant but economically minuscule 0.08 percent. This reflects the very high rate of free-riding behavior by individuals claiming the rebates. We estimate that the ratio of “switchers” (individuals who switch from a non–Energy Star to an Energy Star–rated appliance as a result of the rebate) to “freeriders” (individuals claiming rebates who would have purchased an Energy Star-rated appliance even in the absence of the rebate program) is 1:10, 1:12, and 3:8, for refrigerators, clothes washers, and dishwashers, respectively. As a result, the cost per kilowatt-hour saved is on the order of about $0.25 to $1.50, depending on assumptions and appliance category. The low end of this range is four times the average cost-effectiveness of utility-sponsored energy efficiency programs.

Spending on utility consumer–funded energy efficiency programs is not insignificant, at an estimated $5 billion in 2010—and some expect that these expenditures could double in the next decade. Appliance rebates, such as those we examined, have traditionally been a significant component of such programs, and likely will continue to be. In its proposed Clean Power Plan to reduce greenhouse gas emissions from the power sector, for example, EPA notes that rebates for high-efficiency appliances could represent one approach for achieving such reductions. Our findings could inform how policymakers and program managers at all levels could customize energy efficiency programs to promote cost-effectiveness and maximize their net social benefit.