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Climate Economics Seminar: Free Riders and the High Cost of Energy-Efficiency Subsidies

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Date(s): March 26, 2013, 2 - 3:30 PM

Location: Room 4128, EPA West Building, 1301 Constitution Ave., NW, Washington, DC

Contact: Carl Pasurka, 202-566-2275

Presenter: Judson Boomhower and Lucas W. Davis (Haas School of Business, University of California, Berkeley)

Description: Despite all of the attention aimed at energy-efficiency subsidies, there is a surprisingly small amount of direct evidence evaluating their effectiveness. Economists have long argued that many program participants may be "free riders", getting paid to do what they would have done anyway, but demonstrating this empirically has been difficult because of endogeneity concerns and other empirical challenges. In this paper we use a regression discontinuity analysis to examine participation in a large-scale appliance replacement program. Comparing behavior just on either side of several eligibility thresholds, we find that program participation increases with larger subsidy amounts, but that the magnitude of the increase is small. For example, when an air-conditioner subsidy increases from $110 to $170, the number of participants increases by only 17%.The large fraction of inframarginal households means that larger subsidy amounts are almost certainly not cost-effective. Overall, we find that the cost of increasing program participation through larger subsidies is high, at least $300 per air-conditioner and $250 per refrigerator.

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