Optimal Investment in Energy Efficiency as a Problem of Growth-Rate Maximisation : Evidence and Policy Implications

Following recent developments in economic and finance theory, we formulated in a recent article the question of when and how much a consumer might optimally invest in energy efficiency as a problem of wealth-growth-rate maximisation. In this contribution, we scale up this framework to a unique dataset combining the top three wealth quantiles, and nine generations of single and terraced homes in Germany: 21% of the total building stock, altogether told. We calculate the share of dwellings over time whose consumers see incentive to retrofit, and are able to reproduce (i) the annual variation in the uptake of government subsidies, (ii) the tendency of consumers to wait out the lifetime of their current heating system, (iii) the slow diffusion of new heaters, and (iv) the propensity of consumers to shun deep retrofits. We additionally uncover new wealth effects, most notably the proclivity of richer consumers whose wealth growth faster to retrofit less, and when they do, to etrofit to shallower depths.

We also compute the effects of the German government’s retrofit subsidy schemes, and the proposed carbon tax on heating, employing a counterfactual approach. ... mehrWe discover that wealthier consumers are in general harder to influence via policies. Tracking the effects of policies along several dimensions, we show, among other things, that the tax and subsidy schemes have effects of comparable sizes, and that their effect when combined is greater than the sum of their individual contributions.

All of this has implications for policymakers: the broad conclusion of our work is that household wealth, diminishing marginal utility, and stochasticity in fuel prices can largely explain the diffusion of energy-efficiency measures. Our consequent policy recommendations include a widening of the subsidy base through a reduction or elimination of minimum investment requirements and a redefinition of the relevant thermal standards, increased subsidies for gas “renewable ready” heaters to encourage a step-wise transition towards electricity, and a push for the government itself to become a major player in the renovation market.