Energy efficiency policy in an n-th best world: Assessing the implementation gap

The Energy Efficiency Gap refers to a set of market failures and behavioral anomalies deterring energy efficiency investment. These frictions tend to be studied in isolation, which introduces biases in the welfare assessment of energy efficiency policies. We set out to map the energy efficiency gap in the market for home energy retrofits by developing a utility framework distorted by multiple frictions – CO2 externality, cold- related illness, credit rationing, landlord-tenant dilemma, free-riding in multi-family housing, present bias and status quo bias. Focused on France, the model features a detailed representation of both technology and household characteristics. The frictions are parameterized with the best available empirical estimates. We find that the CO2 externality is dominated by health, rental and multi-family frictions in the ranking of justifications for energy efficiency policy. Taking into account all frictions moreover reverses the generally accepted conclusion that energy efficiency subsidies generate net social costs. Finally, the policy portfolio that prevails in France, which blends subsidies, taxes and regulations, only closes half of the energy efficiency gap. Its efficiency could be improved without spending more by better targeting low-income families, multi-family housing and rental housing.

Recommended citation: Vivier, L. and Giraudet, L.-G. Energy efficiency policy in an n-th best world: Assessing the implementation gap. Working paper, 2024.
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