IMPACT OF PUBLIC SUBSIDIES ON HOUSEHOLD INVESTMENT DECISION IN ENERGY EFFICIENCY ACTIONS

misbe2011 Tracking Number 76

Buildings are responsible for over 30% of carbon dioxide emission in the world. This sector has the largest potential in reduction of energy use demand and CO2 emissions among the IPCC sectors. Besides, rational actors in this sector should have a higher activity as some measures are cost effective, i.e. bills savings stemming from the reduction of energy use over equipments lifetimes are more important than the cost of the measures. In the framework of their climate policy, it is in the interest of public authorities to implement cost effective measures and stimulate investment in energy efficiency actions for housing. The issue is to merge public aims in the reduction of CO2 emissions on a given territory and household private interest in reducing their energy bill. In theory, households hold interest to invest of efficiency energy of their houses, because of comfort improvement and bill cuts. However, in practice and in spite of public financial help, the diffusion of these measures is limited. How subsidies spur households to implement energy efficiency measures in their housing and which are the main barriers to its implementation? This paper provides answers to these questions, presenting the results of an analysis about the energy efficiency measures pay off (like wall insulation or the installation of a new boiler) with, then without, public subsidies and analyzing with a case study the barriers that prevent households to implement energy saving actions despite their economic interest. The study will be based on the potential reduction in CO2 emissions of Grenoble urban area in France. Based on the economic literature, the first part of the paper presents household’s investment decision and assesses the potential cuts in CO2 emissions. The segmentation of Grenoble urban area housing sector based on the type of building, its size, age, heating system, and use gives us a sharp view of the cost and potentialities of CO2 emission cuts and energy saving in this area. Then the household’s investment decision and the analysis of public policies targeting energy efficiency provide the equilibrium in this pure, unbiased, rational world. The second part, based on the empirical study, provides analysis on investment decision when transactions costs, information asymmetries and liquidity constraints are taken into account. This part tries to explain the differences between the equilibrium previously described and reality, and value the potentiality of CO2 emission cuts if biases were removed. The paper concludes that public subsidies allow reducing payback period, but payoff improvement is not enough to encourage households as a whole to implement measures. Even if, thanks to public subsidies, payback is made sufficiently attractive to force investment of rational households with a high actualization rate, a large part of households are still not investing in energy efficiency actions. Besides, even if economic pressure plays a role, households do not ever choose the best payoff. For example they may prefer to replace windows whereas this solution is not cost effective. Informational asymmetry, transaction costs, liquidity constraints tend to explain households choices. This paper provides a methodology to assess potential of CO2 emission cuts and energy savings in the housing sector in a given area. Besides, it estimates the amount of money public authorities could spend to remove biases according to the amount of money they spend on payoff improvement and on the price they value the potential of CO2 emission cuts and energy savings in the considered housing sector.