Market Barriers to Energy-Efficiency Investments *

Abstract

The conservation literature argues that numerous cost-effective conservation measures could be undertaken, but they are not because market barriers discourage such investments. A review of these barriers indicates that, in general, they do not discourage investment and they are not market failures. A conventional investment model suggests that business investments in energy efficiency are made with the same decision rules as any other investments. Consumers who invest in energy efficiency require higher rates of return when the investments are illiquid and they are unable to diversify away the risk. The high discount rates required by consumers for energy-efficiency investments reflect real costs in a competitive market, not artificial market barriers. Policies that encourage the dissemination of information, such as appliance labelling may promote energy efficiency and overall economic efficiency. Policies, such as appliance standards, that require consumers to invest according to lower discount rates, reduce consumers’ overall economic wellbeing. Two market failures that illuminate the need for government support of conservation policies are the external costs of energy consumption and production and the lack of aggregate insurance against energy-related risks.