WP-028: Hunt Allcott and Michael Greenstone, "Measuring the Welfare Effects of Residential Energy Efficiency Programs" (April 2017)

Energy-efficiency programs promise to save consumers money by conserving energy, while also reducing pollution and greenhouse gas emissions. However, past studies of residential energy-efficiency programs have revealed that some programs may not be delivering as promised. Now, a new study by economists Michael Greenstone at the University of Chicago and Hunt Allcott at New York University finds similar results for different programs, while also suggesting concrete ways to improve the programs to have lasting benefits.

The economists conducted a randomized experiment evaluating two large federally-funded residential energy-efficiency programs in Wisconsin. They found that instead of saving Wisconsin residents, the programs had the opposite effect - the costs exceeded the value of the energy savings and the environmental benefits. This is because the realized energy savings were only 58 percent of projected savings and the subsidies were not well targeted at investments with the highest environmental benefits. Additionally, higher subsidies tended to draw in consumers who are “tire kickers” that are unlikely to make investments, indicating low returns to subsidized energy audits. Further, the study did not find any evidence that consumers are poorly informed or suffer from behavioral biases.

While energy-efficiency programs do offer significant potential to reduce pollution and emissions and save consumers money, the study suggests that changes to their design are necessary. Specifically, there is a strong case for reducing, or even removing, subsidies for energy audits. And, subsidies for energy-efficiency investments should be better targeted towards investments that will deliver the greatest cuts in pollution and greenhouse gas emissions. Improving residential energy-efficiency programs in these ways could lead to gains of about $2.50 for every subsidy dollar spent.