WP-007: Sébastien Houde, "How Consumers Respond to Environmental Certification and the Value of Energy Information" (August 2014)

In the US appliance market there are two different energy labels: Energy Guide and ENERGY STAR (ES). The Energy Guide label is the familiar, large yellow label that displays the annual energy consumption of the appliance, an estimate of the annual operating cost, and a scale with a cost range of similar appliances. The ENERGY STAR label complements the Energy Guide label and contains no technical information. The ES label is only put on appliances that meet a certain energy efficiency threshold and therefore identifies the most energy efficient appliances. This paper analyzes consumers’ response to the ES label when purchasing refrigerators.

The results show that consumers, on average, respond to both the ES certifications and electricity costs when deciding which refrigerator to purchase. Some consumers have a large willingness to pay for the ES label, well beyond the energy savings associated with the certified refrigerator; other consumers appear to pay attention to the electricity costs but not to the ES label, and still others appear to be insensitive to both electricity costs and the ES label. These results suggest that the ES label acts as a substitute for more accurate, but complex energy information.

These results are of primary importance for the design of energy policies that target energy demand. Consumers’ inattention to energy efficiency is an oft-cited justification for minimum standards. This paper shows how existing labeling policies in the appliance market may overcome consumer inattention and quantifies the value of the energy information. The policy analysis shows that the overall opportunity cost of imperfect energy information ranges from $12 and $17, on average, per refrigerator sold. Scaling this estimate up to the size of the total US refrigerator market yields a total cost to consumers of $108M per year, which is twice as large as the annual program cost of the ENERGYSTAR program for all appliances.