Measuring the Welfare Effects of Residential Energy Efficiency Programs

Hunt Allcott, Michael Greenstone

NBER Working Paper No. 23386
Issued in May 2017
NBER Program(s):Environment and Energy Economics, Public Economics

This paper sets out a framework to evaluate the welfare impacts of residential energy efficiency programs in the presence of imperfect information, behavioral biases, and externalities, then estimates key parameters using a 100,000-household field experiment. Several results run counter to conventional wisdom: we find no evidence of informational or behavioral failures thought to reduce program participation, there are large unobserved benefits and costs that traditional evaluations miss, and realized energy savings are only 58 percent of predictions. In the context of the model, the two programs we study reduce social welfare by $0.18 per subsidy dollar spent, both because subsidies are not well-calibrated to estimated externality damages and because of self-selection induced by subsidies that attract households whose participation generates low social value. However, the model predicts that perfectly calibrated subsidies would increase welfare by $2.53 per subsidy dollar, revealing the potential of energy efficiency programs.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w23386