Policy Instruments to Foster Energy Efficiency - Green Energy and Efficiency: An Economic Perspective - page 91

case of industry. This difference between the real level of investment in energy
ef ned in various studies such

the one mentioned above is referred to in the literature as the Energy Ef

ciency and the “ economically optimal level ” as de

ciency

Paradox [ 48 ].
In this chapter we focus on the reasons why progress in terms of realizing the
energy ef ciency potential has been so limited. To being with we consider why

individuals and rms do not take advantage of the bene ts of increased energy

ef ciency. Then we turn to the role of policy in moving agents closer to the optimal

level. Governments have a range of instruments at their disposal for doing so and
while some of them have been successful others have not. Lessons can be learnt
from the experience in implementing these different measures. The chapter nishes

with some thoughts on how policies can be made more effective.

2 How Rational Are Individuals in Their Use of Energy?

At the outset it helps to de ciency

more precisely. From an economic perspective measures should be pursued to
increase energy ef

ne the economically optimal level of energy ef

ciency to the point at which the costs of further efforts in
improving it are equal to the benets. In this denition the costs are to be seen as
the social costs and the bene

ts as the social bene ts (as opposed to the private

costs and bene ts). This distinction is important because an individual will only

seek to achieve ef ciency to the point at which private costs and bene ts are

equalized. The social and private bene ts diverge because energy use creates

externalities such as local and global air pollutants. So even if the agents in an
economy were to realize their full net gains from such actions they would not
undertake enough effort in increasing energy ef

ciency.
But in practice agents do not even equate the private bene cient

energy use to the costs and understanding the reasons for that are important. Why
do we not, for example, switch off devices such as TVs when the savings in energy
are signi

ts of more ef

cient light bulbs when all
calculations indicate that they are more cost effective than incandescent ones?
Indeed, researchers have found that individuals discount the future very highly and
that the estimates of energy ef

cant and costs minute? Or buy energy ef

cient choices are based on lower rates. Studies of

choices for energy ef cient refrigerators in US, for example, indicate that con-

sumers mean discount rate is about 39 %, with a normal distribution around that

mean, and standard deviation of 18.7 [ 64 ]. The literature gathers these situations
under the so-called Energy Ef

'

ciency Paradox, and provides a number of reasons
that explain it (see e.g. [ 52 ]). First perhaps is the fact individuals are not always
rational. When facing dif

ed approaches that are
easy to implement. Acting rationally can involve a lot of information processing
and when the costs of dealing with the many decisions are taken into account some
of the so-called non-rational actions look rational [ 39 ].

cult decisions we apply simpli