Residential Energy Literacy and Capitalization

Dirk Brounen, Nils Kok, and John M. Quigley

AREUEA Annual Meeting

Chicago, January 7 2012

Energy consumption and the built environmentEnergy dependence starts in buildings

Small improvements in buildings can have large effects Carbon emissions and buildings are closely related

– At least 30 percent of global greenhouse gas emissions stem from buildings (construction and subsequent economic life)

– Buildings account for 74 percent of U.S. electricity consumption Built environment offers largest potential for greenhouse gas abatement

Impact of energy costs directly affects private consumers Energy costs are a large expense

– 10 percent of net income (in our sample) Salience can only increase with rising energy prices

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Energy Consumption in Buildings Of Which Residential

Energy consumption and the built environmentEnergy dependence starts in buildings

Small improvements in buildings can have large effects Carbon emissions and buildings are closely related

– At least 30 percent of global greenhouse gas emissions stem from buildings (construction and subsequent economic life)

– Buildings account for 74 percent of U.S. electricity consumption Built environment offers largest potential for greenhouse gas abatement

Impact of energy costs directly affects private consumers Energy costs are a large expense

– 10 percent of net income (in our sample) Salience can only increase with rising energy prices

US energy demand: 37 percent from housingEnergy efficiency debate again prominent in policy circles

How to reduce energy consumption in the residential housing market?

1. Stricter building codes and subsidizing retrofits– Works, but mostly for new construction, and effects are small

• Building codes are effective at saving energy (Jacobsen and Kotchen, in press)

– Fiscal tight-belting constrains subsidies

2. Stimulating market efficiency through energy labels– Investments in energy efficiency may lead to:

• Save on current resources, insure against future price increases• Higher transaction prices

– Labels seem to have the desired effect (Brounen and Kok, 2011)

3. Social norms and signals– Providing feedback (Schultz et al., 2007; Alcott, 2011)

Energy efficiency literature assumes rationalityCommercial investors may be different from private agents

Current policies to reduce energy consumption assume rational decision-making by informed investors

That seems to hold for sophisticated investors in commercial property– Labels have financial implications (Eichholtz, Kok, Quigley, 2010, 2011)– Or maybe labels are not even necessary (Jaffee, Wallace, Stanton, 2011)

…but recall the “energy efficiency paradox” (Jaffe and Stavins, 1994)

What if consumers:– Are not aware of their energy consumption– Are not rational in their investment decisions– Have “wrong” default settings

The current literature ignores “energy literacy,” and policies may be based on wrong assumptions

Our contributionThe (missing link) between policy and outcomes

Energy awareness- Do you know?

Energy literacy- Investment decision

Energy behavior- Thermostat setting (level)

- Changing night temperature (discrete choice)

Energy bill- Energy consumption

Financial (il)literacyLusardi and Mitchel (2007) Lusardi and Tufano (2009)

• Demographics: lifestyle and family cycles (Fritzsche,1981; Van Raaij and Verhallen, 1983)

• Home characteristics (Brounen, Kok, Quigley, 2012; Costa and Kahn, 2011)

• Ideology and attitudes (Kahn, 2007)

Data

Dutch National Bank Household Panel– CentERdata (Tilburg University)– Well-established panel (see, for example, Van Rooij et al., 2011)

50 questions on:– Demographics– Financial background– Home characteristics– Residential energy consumption and literacy

Link to recent surveys on attitude and ideology (smaller sample):– Personality – Political preferences– Spending behavior

Executed in 2011, N = 1,721 (out of 2,028)

Energy Awareness and Literacy (I)

44 percent of the respondents has “no idea”

Energy Awareness and Literacy (I)

44 percent of the respondents has “no idea”

Regression results (logit)Explaining energy awareness

Energy Awareness and Literacy

40 percent or the respondents does not know or makes “irrational” choice

Energy Awareness and Literacy

40 percent or the respondents does not know or makes “irrational” choice

Regression results (logit)Explaining energy literacy

Outcomes of energy awareness and literacy can be measured in ….behavior

….and consumption:

(2)

– Ei is the logarithm of gas consumption in euros for dwelling i– Di is a vector of demographic characteristics, including age and gender of the

head of the household, household composition, education and income – Xi is a vector of the hedonic characteristics of building i, including dwelling

size and period of construction

Energy behaviorThermostat settings

Outcomes of energy awareness and literacy can be measured in ….behavior

….and consumption:

(2)

– Ei is the logarithm of gas consumption in euros for dwelling i– Di is a vector of demographic characteristics, including age and gender of the

head of the household, household composition, education and income – Xi is a vector of the hedonic characteristics of building i, including dwelling

size and period of construction

Energy behaviorThermostat settings

Regression results (II)Behavior, demographics, and attitude

Regression results (III)Energy conservation, home characteristics, and behavior

Conclusion and implicationsEnergy literacy is still low

Small improvements in buildings can have large effects– Energy consumption and buildings are closely related

Current policies to reduce energy consumption assume rational decision-making by informed investors

Energy literacy among private consumers quite low (in line with general findings on energy literacy – Lusardi and Mitchell, 2008)– 44 percent of our sampled households is not aware of their utility bill

• In this case stimulating energy savings is difficult• Predominantly young spenders that are poorly

organized– 40 percent of households is not able to tradeoff short term outlays with long

term savings

• Less efficient investment, lower upfront costs• Predominantly the lower educated households

– Raising awareness on energy consumption – providing feedback (“OPOWER” experiments)

Thermostat settings matters for the utility bill– High evening settings increase the bill (which is the case among the elderly

and the wealthy)– Lowering the night settings substantially decreases the bill

…but, 28 percent of the households do not lower their thermostat during night– They ignore the low hanging fruit of energy conservation– Comparable to “woodhead” behavior of mortgage holders (Quigley and

Deng, 2002)

• Energy conservation as the implicit default setting• Smart meter rollout offers opportunity

Next steps: randomized field experiment with utilities

Conclusion and implicationsDefault behavior is “wrong”