Mind the gap? Critically reviewing the energy efficiency gap with empirical evidence

Abstract

A large body of literature suggests that households could save money by increasing the level of energy efficiency of the energy-using durables they purchase – a so-called “energy efficiency gap”. High implicit discount rates estimated from purchases of energy-using durables have generally been interpreted as evidence of such an energy efficiency gap. However, the “discounting gap” between econometrically estimated discount rates and risk-adjusted market interest rates commonly presented in the literature is caused by different factors not all of which portray privately suboptimal purchase decisions by households. In particular, the discounting gap overstates the size of an energy efficiency gap in the choice between efficient and inefficient durables because of estimation and interpretation flaws. This article reviews the factors potentially explaining the observation of a discounting gap in the purchase of energy-using durables. It separates the factors only contributing to a discounting gap from the ones causing an energy efficiency gap to reveal a discrepancy between the size of the estimated discounting gap and the empirical findings of privately inefficient behavior by households.