Kenneth Gillingham

Peer Effects in the Diffusion of Solar Photovoltaic Panels

Social interaction (peer) effects are recognized as a potentially important factor in the diffusion of new products. In the case of environmentally friendly goods or technologies, both marketers and policy makers are interested in the presence of causal peer effects as social spillovers can be used to expedite adoption. We provide a methodology for the simple, straightforward identification of peer effects with sufficiently rich data, avoiding the biases that occur with traditional fixed effects estimation when using the past installed base of consumers in the reference group. We study the diffusion of solar photovoltaic panels in California and find that at the average number of owner-occupied homes in a zip code, an additional installation increases the probability of an adoption in the zip code by 0.78 percentage points. Our results provide valuable guidance to marketers designing strategies to increase referrals and reduce customer acquisition costs. They also provide insights into the diffusion process of environmentally friendly technologies.

Energy policy: The rebound effect is overplayed

Increasing energy efficiency brings emissions savings. Claims that it backfires are a distraction, say Kenneth Gillingham and colleagues.

Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence

Despite several decades of government policies to promote energy efficiency, estimates of the costs and benefits of such policies remain controversial. At the heart of the controversy is whether there is an “energy efficiency gap,” whereby consumers and firms fail to make seemingly positive net present value energy saving investments. High implicit discount rates, undervaluation of future fuel savings, and negative cost energy efficiency measures have all been discussed as evidence of the existence of a gap. We review explanations for an energy efficiency gap including reasons why the size of the gap may be overstated, neoclassical explanations for a gap, and recent evidence from behavioral economics that has potential to help us understand why a gap could exist. Our review raises fundamental questions about traditional welfare analysis, but we find the alternatives offered in the literature to be far from ready for use in policy analysis. Nevertheless, we offer several suggestions for policymakers and for future economic research. (JEL: Q38, Q41)

Split Incentives in Residential Energy Consumption

We explore two split incentive issues between owners and occupants of residential dwellings: heating or cooling incentives are suboptimal when the occupant does not pay for energy use, and insulation incentives are suboptimal when the occupant cannot perfectly observe the owners insulation choice. We empirically quantify the effect of these two market failures and how they affect behavior in California. We find that those who pay are 16 percent more likely to change the heating setting at night and owner-occupied dwellings are 20 percent more likely to be insulated in the attic or ceiling. However, in contrast to common conception, we find that only small overall energy savings may be possible from policy interventions aimed at correcting the split incentive issues.

The Rebound Effect and Energy Efficiency Policy

What do we know about the size of the rebound effect, the well-known phenomenon that improving energy efficiency may save less energy than expected due to a rebound of energy use? Is there any validity to the claims that energy efficiency improvements can actually lead to an increase in energy use (known as backfire)? This article clarifies what the rebound effect is and provides a guide for economists and policymakers interested in its existence and magnitude. We discuss how some studies in the literature consider a rebound effect that results from a costless exogenous increase in energy efficiency, whereas others examine the effects of a specific energy efficiency policy—a distinction that leads to very different welfare and policy implications. We present the most reliable evidence available about the size of the energy efficiency rebound effect and discuss situations where such estimation is extraordinarily difficult. With this in mind, we present a new way of thinking about the macroeconomic rebound effect. We conclude that overall, the existing research provides little support for the so-called backfire hypothesis. However, our understanding of the macroeconomic rebound effect remains limited, particularly as it relates to induced innovation and productivity growth. (JEL: H23, Q38, Q41)

Using and improving the social cost of carbon

Regular, institutionalized updating and review are essential The social cost of carbon (SCC) is a crucial tool for economic analysis of climate policies. The SCC estimates the dollar value of reduced climate change damages associated with a one-metric-ton reduction in carbon dioxide (CO2) emissions. Although the conceptual basis, challenges, and merits of the SCC are well established, its use in government cost-benefit analysis (CBA) is relatively new. In light of challenges in constructing the SCC, its newness in government regulation, and the importance of updating, we propose an institutional process for regular SCC review and revision when used in government policy-making and suggest how scientists might contribute to improved SCC estimates.

The Microeconomic Theory of the Rebound Effect and Its Welfare Implications

Economists have long noted that improving energy efficiency could lead to a rebound effect, reducing or possibly even eliminating the energy savings from the efficiency improvement. This paper develops a generalized model to highlight features of the theory of the microeconomic rebound effect that are particularly relevant to empirical economists. We demonstrate when common elasticity identities used for empirical estimation are biased and how gross complement and substitute relationships govern this bias. Furthermore, we formally derive the welfare implications of the rebound effect to provide clarity for ongoing policy debates about the rebound.

Opportunities for advances in climate change economics

Target carbons costs, policy designs, and developing countries There have been dramatic advances in understanding the physical science of climate change, facilitated by substantial and reliable research support. The social value of these advances depends on understanding their implications for society, an arena where research support has been more modest and research progress slower. Some advances have been made in understanding and formalizing climate-economy linkages, but knowledge gaps remain [e.g., as discussed in (1, 2)]. We outline three areas where we believe research progress on climate economics is both sorely needed, in light of policy relevance, and possible within the next few years given appropriate funding: (i) refining the social cost of carbon (SCC), (ii) improving understanding of the consequences of particular policies, and (iii) better understanding of the economic impacts and policy choices in developing economies.

BARRIERS TO IMPLEMENTING LOW-CARBON TECHNOLOGIES

This paper reviews the major barriers to the adoption of low-carbon technologies, with a focus on market failures that provide a rationale for policy intervention to improve economic efficiency. Market failures include externalities, asymmetric information, institutional failures, regulatory failures, and failures of consumer or firm decision-making. We discuss central generation renewable energy technologies, CCS technology, distribution generation renewable energy, and technologies to reduce the demand for energy. For each technology category, we assess whether and how policy might improve economic efficiency, and point to key open research questions.

Deconstructing Solar Photovoltaic Pricing: The Role of Market Structure, Technology, and Policy

Author(s): Gillingham, Kenneth; Deng, Hao; Wiser, Ryan; Darghouth, Naim; Nemet, Gregory; Barbose, Galen; Rai, Varun; Dong, C.G.