The economics of energy efficiency: insights from voluntary participation programs

Abstract

This paper reviews experience with two programs sponsored by the US Environmental Protection Agency — the Green Lights and Energy Star Office Products programs — that promote the adoption of energy-efficient technologies through voluntary agreements with private sector firms. The evidence suggests that Green Lights has induced firms to make investments in cost-saving lighting systems that firms failed to exploit prior to the program's implementation. Energy Star Office Products, in contrast, has led suppliers of computers and electronic equipment to substantially improve the energy efficiency of their products in ways that confer net cost savings on equipment users. The paper argues that the success of these programs is based on their ability to reduce market failures related to problems of imperfect information and bounded rationality that impair the effectiveness of both intra-firm organization and the coordination between equipment suppliers and their customers. Given the nature of the technologies in question, these programs should have little effect on the demand for energy services so that energy efficiency improvements should lead to one-to-one reductions in the level of energy use.