Energy efficiency subsidies, additionality and incentive compatibility under hidden information
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This paper examines the ‘additionality’ of energy savings in energy efficiency subsidy programs. ‘Additionality’ refers to the energy savings caused by actions beyond what would have occurred in the absence of the policy program. We characterise energy consumers’ strategic response to the subsidies in a formal adverse selection model and show how the subsidy program may fail to satisfy the additionality criterion. This occurs when energy consumers, who partake in the program, have different preferences for energy efficiency technologies that are unobservable. To resolve this, we propose an incentive compatible solution within the subsidy program that can mitigate the non-additionality problem and improve the effectiveness of the scheme.
KeywordsEnergy efficiency subsidy Energy efficiency policy Additionality Hidden information
JEL classificationD82 Q48 Q55
We thank the audience at presentations at the 2017 International Conference on Energy Finance for the helpful comments. We also thank Lana Friesen and Kjetil Telle for their constructive comments on the previous versions. Shen Peiyao gratefully acknowledges the financial support from the Natural Science Foundation of China (No.71873028). The invaluable and insightful comments by four anonymous referees and by Paolo Bertoldi have led to a much improved paper. All errors are ours.
Compliance with ethical standards
Conflict of interest
The authors declare that they have no conflict of interest.
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