Will a Rebate of $4,000 Stimulate Green Residential Retrofits?

There are a bunch of “small ball” investments that could be made to reduce a home’s monthly electricity bill.  Can targeted subsidies increase residential energy efficiency?   In California,  “Homeowners who pursue a “basic” energy efficient upgrade will get a rebate of $1,000. Property owners who choose an advanced package qualify for rebates from $1,250 to $4,000. The rebates depend on the energy savings achieved and the utility provider.” 

Dora Costa and I show in this paper that the more inefficient homes were built in the 1970s in areas where electricity prices were low when the home was first constructed.    An interesting economic incidence issue will arise.  Anticipating this new large retrofit subsidy, will “energy efficiency” firms raise the prices they charge for performing a retrofit?  If this is a competitive industry, then they won’t be able to.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

9 thoughts on “Will a Rebate of $4,000 Stimulate Green Residential Retrofits?”

  1. I haven’t read the paper so this is probably a dumb comment, but I feel compelled to make it. Did you take into account that some homes built in the 1960s and 1970s were not designed to be occupied during months when energy consumption would be high? I’m thinking of a friend who lives in Palm Springs in a housing tract that was designed (and insulated) for winter living, with no expectation that it would be occupied year-round.

  2. I think this is an area where “command and control” central planning would work well.

    A tax credit misses people who don’t pay much taxes, or who can’t wait for a tax refund. It also imposes a lot of paperwork on people.

    A public entity, however, could simply provide these services at a subsidized rate where it would be most cost effective.

  3. Xcel in Colo is cutting back on their solar rebate program, without coordinating with their partners. The solar firms are concerned that their legs are cut out from underneath them with no notice. We’ll see how it plays out, but it is happening in the face of pending EPA regs (hopefully), rising oil prices, mounting evidence that fracking is a bad idea, and so on. You’d think in a rational world solar would be an opportunity – especially in a place with tremendous sun.

    Nonetheless, I agree our older building envelopes are sadly inefficient and something should be done. The elasticity number is nice, but a better number is the durability of such homes in the future, and the likelihood of being occupied before and after retrofit. Maybe some sort of value increase. That is what is needed.

  4. I don’t see why I should be subsidising people who insist on hot air in the winter. Shut down all the coal plants, and if people want expensive nuclear power for their wasteful lifestyles, let them pay for it. I am perfectly capable of putting on some wool clothing, and don’t see why i should be be pickpocketed by those who can’t.

  5. If the paper is accurate, it’s a good thing because it’s a sign that markets work at least a little. Total cost of ownership is reduced by building cheaper, less-energy-efficient houses in times when energy prices are low. Yeah, ultimately shortsighted, but then buildings are a weird thing, with de facto lifetimes typically much longer than their depreciation lives, or even their practical lives.

    What the need for tax rebates shows is that the market for energy efficiency is still failed. Any decent energy-delivery company should have the capital access and flexibility to finance efficiency improvements by its customers, especially given the opportunities offered by shaving peak demand.

  6. @Paul, I don’t entirely disagree with the ‘failed’ assertion, and part of the problem is how many companies finance their capital improvements: via rates. If there are too many efficiencies, revenue decreases. It is particularly maddening here in Colo, where the water and energy folks can’t seem to break out of these shackles, angering most of the ratepayers in this state, such that experiments in ‘Smart Grid’ are frowned upon.

  7. Paul, do remember that in many places, landlords pay for capital improvements, but tenants pay the operating costs.

  8. Mobius: this is why market institutions matter.

    And one crucial thing to remember — at least in the short-to-medium term — is that pretty much everything except baseload power is sold at a loss. Utilities should be thrilled (and a financial system that wasn’t a complete crock) to sell fewer peaking kwh, and even much of the mid-load.

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