Fifth World Congress of Environmental and Resource Economists

It is frequently argued in policy circles that imperfect information and other cognitive constraints may lead consumers to discard privately profitable investments in energy efficiency. Using product-level panel data from 2002 to 2007 on the UK refrigerator market and a discrete-choice framework, we reject this view: our estimate is that purchasers of refrigerators implicitly discount future electricity costs at a reasonably low rate of 10.5%. As consumers apparently make rational investment decisions, taxing energy would be the route to further increase energy efficiency. However, we make simulations which demonstrate a very small elasticity of energy use to the price of electricity (-0.16). The reason is that most of the energy cost increase is compensated by suppliers through relatively larger price reductions of highly energy consuming products. This finding calls for moving attention in the energy efficiency debate to the pricing behavior of manufacturers of durables.