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Title: Uncertainty, loss aversion, and markets for energy efficiency

Increasing energy efficiency is critical to mitigating greenhouse gas emissions from fossil-fuel combustion, reducing oil dependence, and achieving a sustainable global energy system. The tendency of markets to neglect apparently cost-effective energy efficiency options has been called the efficiency gap or energy paradox. The market for energy efficiency in new, energy-using durable goods, however, appears to have a bias that leads to undervaluation of future energy savings relative to their expected value. This paper argues that the bias is chiefly produced by the combination of substantial uncertainty about the net value of future fuel savings and the loss aversion of typical consumers. This framework relies on the theory of contextdependent preferences. The uncertainty-loss aversion bias against energy efficiency is quantifiable, making it potentially correctible by policy measures. The welfare economics of such policies remains unresolved. Data on the costs of increased fuel economy of new passenger cars, taken from a National Research Council study, illustrate how an apparently cost-effective increase in energy efficiency would be uninteresting to lossaverse consumers.
Authors:
 [1]
  1. ORNL
Publication Date:
OSTI Identifier:
1024299
DOE Contract Number:
DE-AC05-00OR22725
Resource Type:
Journal Article
Resource Relation:
Journal Name: Energy Economics; Journal Volume: 33
Research Org:
Oak Ridge National Lab. (ORNL), Oak Ridge, TN (United States)
Sponsoring Org:
USDOE Office of Energy Efficiency and Renewable Energy (EERE)
Country of Publication:
United States
Language:
English
Subject:
54 ENVIRONMENTAL SCIENCES; AUTOMOBILES; COMBUSTION; ECONOMICS; EFFICIENCY; ENERGY EFFICIENCY; ENERGY SYSTEMS; FUEL CONSUMPTION; GREENHOUSE GASES; MARKET; OCCUPANTS