Financing the decarbonized energy system through green electricity tariffs: A diffusion model of an induced consumer environmental market

Abstract

This paper explores whether consumer-focused green electricity tariffs can incentivize investment in the transition to a decarbonized energy system. Green electricity tariffs are a means by which ‘green consumers’ can contribute to investment in renewable energy and energy sector transition. In order to conceptualize factors constraining the adoption of green electricity tariffs this paper develops a model that links the willingness-to-pay (WTP) literature with the established innovation diffusion literature. This concern arises from a need to reconcile the large disparities that have been empirically observed between the proportion of households actually adopting green electricity tariffs and the proportion in WTP surveys that claim they would (stated-willingness-to-adopt or SWA). Using the Bass Model as the point of departure our model depicts how increasing consumer environmental concern, driven by word-of-mouth and mass media communication channels, results in an increasing proportion of households with a SWA. The presence of response bias and the free rider problem result in ‘feasible adoption’ being below the SWA. Feasible adoption is, in turn, differentiated from actual adoption by the extent of market imperfections, such as the supply side problems and regulatory failures often discussed in the empirical literature.