Conference Agenda

We analyze energy-efficiency policy in the form of a minimum-efficiency standard for consumer durables such as cars, building insulation, or household appliances. Such a policy has two effects. At the intensive margin, a household that invests will choose a more efficient device. At the extensive margin, more households will choose not to invest at all. We analyze the equilibrium effects of a minimum-efficiency standard, taking household heterogeneity, endogenous investment decisions, and price adjustments into account. A moderate minimum-efficiency standard increases demand for more efficient consumer durables and reduces energy demand. A stricter policy is less effective or even counterproductive.

In particular, we show that a stricter minimum-efficiency standard increases the rebound effect and ultimately backfires. We decompose the rebound effect and uncover a new channel arising from the endogenous investment decisions. In our central calibration of the CAFE standard, this investment effect accounts for one third of the total rebound effect and makes a stricter standard almost ineffective. Finally, we analyze the distributional consequences of a minimum-efficiency standard and compare them to those of an energy tax. Producers of household appliances (‘’energy-efficiency capital”) benefit more and energy producers suffer more from the standard than from the tax. Furthermore, non-investing households prefer the standard, whereas investing households tend to prefer the tax.