Does the Technology Exist? Understanding the Provision of Energy Efficiency and the
Effectiveness of Energy Efficiency Regulations
By
Rasha Ahmed
Assistant Professor
Department of Economics
Trinity College
Hartford, CT
Phone: 860 297 2446
Fax: 860 297 2163
Rasha.Ahmed@trincoll.edu
And
Mark Stater
Associate Professor
Department of Economics
Trinity College
Hartford, CT
Phone: 860 297 2462
Fax: 860 297 2163
Mark.Stater@trincoll.edu
Abstract:
Global energy demand has been increasing by about 2% per year for the past 35 years and is
expected to increase at that rate if no significant change in energy use takes place. The resulting
environmental threats of increased carbon emissions and global warming have focused attention
on alternative policies to reduce energy consumption. Policy makers are considering polices to
improve the energy efficiency of different consumer products including household appliances,
automobiles and light bulbs. The Department of Energy (DOE) has imposed minimum
efficiency standards to increase the energy efficiency of household appliances and has adopted
various programs to promote production of green and smart appliances. Similarly, the Corporate
Average Fuel Economy (CAFE) standard on automobiles aims at improving the fuel economy of
new automobiles.
Despite the importance of energy efficiency regulation, in many cases these regulations were
slow to emerge. One reason is the concern that the technology does not exist to improve the
energy efficiency of products without significantly sacrificing other product quality attributes. In
2008 the CAFE standard increased by 40% to 35mpg for passenger cars after a long period of 20
years where the standard was set at 27.5 mpg. Previous attempts to raise CAFE have been
strongly opposed by the automobile industry claiming that higher standards will require
significant tradeoffs in terms of automobile power and weight.
The objective of this paper is to understand the tradeoffs involved in the provision of energy
efficiency in consumer products. This in turn will help us analyze the effectiveness of alternative
energy efficiency regulations. Specifically we ask 1) under what conditions is the combination
of the product energy efficiency and quality provided by firms inefficient, 2) do firms underprovide energy efficiency conditional on the quality of the product, 3) do energy efficiency
regulation always imply a sacrifice in other quality attributes and 4) how effective are alternative
energy efficiency regulations? To understand the provision of energy efficiency we build a
theoretical model that accounts for the technological tradeoff between energy efficiency and
other quality attributes that producers face. Knittel (2012) estimates this tradeoff and shows that
a “fuel economy/ weight/ engine power production possibilities frontier” exists. Thus, the choice
of energy efficiency will depend on consumer preferences over product attributes as well as the
technological tradeoff.
The paper builds a model of quality choice where a monopoly firm choses the product attributes
of different models that it offers. There are two groups of consumers that differ in their
willingness to pay for (or intensity of use of) the product, referred to as the high and the low
group. Both groups value the service they get from the product which is determined by the
energy efficiency and the product quality. The firm produces two product models, one for each
group. The model is similar to models in Fischer (2005) and Ferrara (2007), which model the
choice of a single product attribute. However, in this paper we generalize by considering
multiple product attributes with a tradeoff between energy efficiency and product quality.
The results suggest that when the energy price is lower than the true energy cost, the monopoly
will underprovide energy efficiency to each group. In addition, information problems that do not
allow the firm to identify the consumer type will lead to further distortion in the energy
efficiency/quality choice to the low willingness-to-pay group. The firm produces a green model
for the high willingness-to-pay group only if the energy price is high enough. Interestingly
enough the monopolist may produce a product with an energy efficiency/ quality combination
that is below the technological frontier. This will depend on the number of consumers in each
group and on their willingness to pay. The results suggest that improvements in energy
efficiency may not result in sacrificing product quality. Thus the technology to improve energy
efficiency may exist but not be fully utilized.1
References:
Fischer, Carolyn (2005). “On the Importance of the Supply Side in Demand-Side Management,”
Energy Economics, 27(1): 165-180.
Ferrara, Ida (2007). "Automobile quality choice under pollution control regulation,"
Environmental & Resource Economics, 38(3): 353-372.
Knittel, C. R. Forthcoming. “Automobiles on Steroids: Product Attribute Trade-Offs and
1
The authors are still working on analyzing the efficiency of alternative policies including an energy tax and a
CAFE type standard.
Technological Progress in the Automobile Sector.” American Economic Review
JEL Codes: Q40, Q48, Q58