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Energy Efficiency Is A Great Investment, So Why Aren’t More People Investing?

Saving energy is a totally rational, totally hard thing to do.

Energy Efficiency Is A Great Investment, So Why Aren’t More People Investing?
[Illustrations: Benzoix via Shutterstock]

Energy-efficiency investments are the best type of energy investments. The American Council for an Energy-Efficient Economy says saving one kilowatt hour (kWh) of power costs 2.8 cents on average, against a cost of 10 cents per kWh for producing actual power. Many companies have seen returns of 30% or more from doing simple things. And there’s plenty of opportunity out there. McKinsey says the U.S. could save more than $1 trillion just by adopting available efficiency technology.

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And yet, energy efficiency still isn’t the hot ticket it might be. Compared to various emerging types of energy generation, it doesn’t command the same attention or interest. And the amount invested in the sector doesn’t match the amount you might expect from a rational point of view. There’s what the economist Todd Gerarden calls an “energy paradox” or an “energy-efficiency gap”–a divergence between what economics says should happen and what is happening.


Why? That’s the subject of a new paper by Gerarden, a PhD candidate at Harvard University, and two of his senior colleagues. They look at a range of reasons for the phenomenon and come to some tentative conclusions–or at least some avenues that might be worth further exploring. These include that energy products are not properly priced relative to their full value; that people are inattentive to energy costs when they buy, say, lightbulbs and household appliances; and that there are cases of “split incentives”–for example, landlords might buy inefficient equipment because renters are paying utility bills.

“Many fuels are over-purchased relative to their economic and social value, because in many cases prices do not incorporate environmental externalities,” Gerarden says in an email. “So, in that sense, every energy-efficient version of a product is potentially ‘under-purchased’ relative to its economic and social value.”


Another possibility is there are “unobserved costs” in energy-efficiency purchase decisions. For example, it may seem logical for someone to retrofit their house if they’re going to save money. But it might be that they’re put off by the time and effort it takes to hire a contractor, or from having a chaotic house while the work is being done. Similarly, it may be rational to buy a more fuel-efficient car, but people might be dissuaded for other reasons. For example, it may be a smaller or less powerful model.

The paper frankly is a little frustrating because it’s better at asking questions than giving definitive answers. But it does seem in general that more consumer information could help break some of the log-jams (for instance, cost calculations for appliances that include energy). Gerarden also would like to see more accurate energy pricing. “The most important barrier is that energy prices for many types of fuels are too low because they do not account for negative impacts outside the traditional market,” he says.

About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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